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New Security Deposit Legislation May Have Unintended Results

July 17, 2020

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Legislation affecting security deposits has been making noise this year in local governments, reports the National Apartment Association (NAA).

“Policymakers have responded by enacting measures that allow renters to apply their security deposit to rent and give them broad flexibility in paying these upfront costs,” NAA writes. “While well-intentioned, these approaches could leave rental housing providers with less protection against damage and default."

“Since COVID-19, renters’ choice policies have seen renewed fervor. Gov. Andrew Cuomo of New York and Gov. Phil Murphy of New Jersey have issued executive orders providing renters security deposit flexibility during the pandemic. Similar legislation was introduced in Pennsylvania recently via House Bill 2427."

“Security deposits and other upfront costs have long been seen as barriers to prospective renters’ housing choice and access. Thus, it is no surprise that supporters have been advocating for changes to security deposit laws through the lens of ‘renters’ choice’ legislation," NAA reports.

Security deposit amounts are definitely top of mind for many residents. A recent study of resident opinions found that 87% of respondents felt that if they knew the amount of the security deposit upfront (rather than at lease signing), it would be very influential on their decision about which apartment to rent.

NAA continues, “Security deposit insurance has been framed as a housing affordability solution that streamlines costs for renters and requirements for operators. While many in the industry agree there may be benefits to new approaches, it remains critical that lawmakers balance the interests of all stakeholders and consider some of the potential unintended consequences."

“For renters, they are charged a monthly insurance premium which could exceed the cost of a traditional security deposit if the renter remains in the unit for more than one year, and unlike traditional deposits, insurance fees are nonrefundable. Renters may also be unaware that they remain liable for repairs or damages that exceed the policy’s coverage and could be taken to collections for unpaid balances, which could have lasting effects on their credit."

“For housing providers, laws that require owners and operators to accept insurance products are concerning because the market for these products is relatively new and not yet widely accepted. Some of the products remain unproven and would benefit from market testing. For example, if a renter fails to make a payment, it could leave an owner without protection from financial loss. Additionally, some insurance providers pool renters’ policies together at the property level, which could result in an imbalance between the level of coverage applied to participating renters and funds allocated to cover claims. In this scenario, a housing provider could be left to recover outstanding amounts from the renter."

“Policymakers should allow for more widespread adoption of these products before they mandate that housing providers participate.”

In addition to policies that require housing providers to accept insurance products, lawmakers are expanding security deposit laws to allow flexibility in payments, according to NAA.

In Minneapolis, the city council mandated strict limitations on security deposits (effective June 1). The city’s sweeping renter protections ordinance allows security deposits of a maximum of one month’s rent, or half a month’s rent if a deposit is required by the end of the first month of tenancy. The law requires owners to accept the security deposit in installments of up to three months upon the renters’ request.

“These security deposit expansions law may end up hurting the populations they were intended to help,” NAA says. “If owners and operators cannot properly manage their risk, they are less likely to accept applicants with adverse credit history or current financial challenges."

“Capping security deposits could negatively affect renters who are credit invisible, have bad credit or live on a fixed income and might elect to pay a larger security deposit. This flexibility allows housing providers to balance their exposure to risk and expand housing access to renters who would not otherwise qualify."

“Strict limitations on the size of the security deposits and mandated insurance alternatives could create more problems than they would solve.”

For additional information on security deposit laws and policies, contact Alex Rossello, NAA’s Manager of Public Policy.

Photo by Andy Feliciotti on Unsplash