June 17, 2020 |
Updated June 18, 2020
The fallout from the nationwide shutdown has been severe, with economic stagnation expected for the foreseeable future. As tens of millions now file for unemployment, many Americans are asking their elected officials what government will do to ease their heavy financial burden. 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. While well-intentioned, these approaches could leave rental housing providers with less protection against damage and default.
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. Cincinnati was the first to require housing providers to accept security deposit insurance at the request of an applicant or maintain flexibility in payment amounts in lieu of a traditional security deposit or surety bond.
Since the COVID-19 pandemic began, 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, while similar legislation was introduced in the Pennsylvania State Assembly recently via House Bill 2427. Policymakers see relaxing security deposit requirements as a way to quickly open up financial resources for struggling communities. This takes the onus off of diminishing state and local coffers. Additionally, security deposit insurance has been framed as a housing affordability solution that streamlines costs for renters and requirements for operators. While we 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. In Minneapolis, the city council mandated strict limitations on security deposits (which become effective on June 1). The city’s sweeping renter protections ordinance allows a maximum security deposit 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 also requires owners to accept the security deposit in installments of up to three months upon request of the renter.
These expansions of security deposit law may end up hurting the populations they were intended to help. 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.
Especially in times of crisis, rental housing providers must maintain the ability to manage risk; it is critical to ensure the viability of the rental housing industry. The apartment industry supports innovation and legislative changes that streamline requirements and lower costs for owners and renters. However, strict limitations on the size of the security deposits and mandated insurance alternatives could create more problems than they would solve. Legislators must avoid changes to security deposit laws that fail to adequately balance the responsibilities of both parties.
For more information on security deposit laws and policy concerns, please contact Alex Rossello, NAA’s Manager of Public Policy.