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Security Deposit Replacement Legislation: A Lay of the Land in 2020

What Are Security Deposit Replacement Laws?

Security deposit legislation refers to the laws that govern how property managers can collect money from renters to protect against damage and unpaid rent. Each state has different security deposit laws, but lately, lawmakers have been paying closer attention to them as more renters demand affordable move-ins and new security deposit replacement solutions enter the market. In response, new security deposit replacement legislation has been cropping up across the nation.

Security deposit replacement laws mark the industry-wide trend towards eliminating deposits entirely.

Why Is Security Deposit Legislation In The Spotlight?

To keep up with the modern renter’s needs and to address housing affordability issues, cities and states have gradually been adopting legislation that requires property managers to offer security deposit alternatives in addition to the traditional security deposit. Pennsylvania is one of the more recent examples where lawmakers have proposed a bill requiring that deposit replacements be offered to renters. The bill takes security deposit legislation one step farther than most deposit laws by providing apartment operators with complete deposit replacement solutions, rather than simply tightening deposit regulations.

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Security Deposit Legislation By State

To see a list of state and city deposit restrictions and deposit replacement laws, view our Deposit Replacement Law Tracker.

Breaking Down Deposit Restrictions Vs. Deposit Alternatives Vs. Deposit Replacements

Security Deposit Restrictions

Security deposit restrictions deal strictly with how security deposits are to be structured and managed. Historically they have been the most common deposit laws, based primarily on tightening maximum deposit amounts, regulating how soon deposit funds must be returned, and requiring deposit installment plans. However, lawmakers are expanding beyond just deposit restrictions more recently by providing residents and apartment operators other options for moving away from deposits.

Security Deposit Alternatives

The options offered to renters as an alternative to security deposits are known as security deposit alternatives. These alternatives aim to give renters a choice in how their money is managed but do not get rid of deposits entirely. Alternatives include surety bonds, deposit installment solutions, and guarantors. Cincinnati sparked this movement with its Renter’s Choice law which mandates that if an operator requires a security deposit, a deposit alternative or payment plan must be offered as well.

security-deposit-alternatives-vs-deposit-replacementsFor a full comparison of security deposit replacements and alternatives, see here.

Security Deposit Replacements

Security deposit replacements differ from security deposit alternatives in that they seek to completely remove and replace costly security deposits with more affordable options such as lease insurance. These deposit replacements 1) give renters an affordable move-in and 2) offer properties enhanced protection, meaning they help both renters and operators. The introduction of security deposit replacement laws represents a movement toward total deposit removal. For example, the recent Pennsylvania bill pushes the needle closer to achieving total deposit replacement by giving operators the choice to fully eliminate security deposits with lease insurance.

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On the whole, security deposit replacements have gained more traction, especially amid the COVID-19 pandemic, as renters work to pay rent and operators try to avoid major rent loss.

Who Is Proposing & Passing New Security Deposit Replacement Laws?

In an effort to introduce more security deposit alternatives to the market, lawmakers in cities such as Cincinnati, Philadelphia, New York City, and Santa Cruz, have either proposed, pledged support for, or passed new deposit replacement legislation. These new deposit replacement laws aim to ensure renters, property owners, and operators all benefit from the elimination of costly security deposits.

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The rental housing industry may be slow to adopt deposit alternatives, but COVID-19 and growing economic uncertainty have accelerated the national movement towards total deposit replacement.

What Are the Benefits of Eliminating Security Deposits?

Eliminating security deposits makes renting more affordable by removing large upfront payments for residents. On the leasing side, replacing security deposits with a new solution such as lease insurance offers four main advantages:

  1. Provides better protection against unexpected events – Lease insurance gives financial protection that owners and operators need when unexpected events or market disruptions make it harder for residents to pay rent (e.g., COVID-19).
  2. Generates more traffic and higher conversion rates – Many renters can’t afford the large upfront cost of security deposits, so communities that don’t require security deposits gain a competitive advantage by reducing move-in costs.
  3. Reduces administrative hassles for leasing staff – The removal of security deposits means the administrative headache of managing and refunding them also goes away.
  4. Helps improve online reputation – With no deposits, renters can’t get upset about deductions — and while deposit alternatives such as surety bonds still leave renters on the hook, lease insurance ensures renters are happier with their move-out experience and thus more likely to leave positive reviews.

What Does New Security Deposit Legislation Mean for Rental Housing?

The rental housing industry and lawmakers would agree that the security deposit system is broken. While some cities have sought to repair security deposit regulations by requiring installment plans and lowering security deposit maximums, none went far enough in addressing the true problem: security deposits.

By eliminating security deposits completely, however, renter affordability and better property protection take a front seat.