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New proposed state legislation would put more cash in the hands of tenants–if landlords are willing to do a little comparison shopping.

Under existing state laws, landlords must put tenant security deposits into interest-bearing accounts, returning the money to the tenant with interest at the end of the lease. As an administrative fee, the landlord is allowed to keep one percent of the deposit.

The system worked fine decades ago, when standard bank savings rates were up around 5 percent; tenants would still be able to get a decent return after the landlord had collected his 1 percent share.

Now, with regular savings account rates hitting rock-bottom, these accounts often have piddling returns-as low as 1.1 percent, according to the Attorney General’s office. After the landlord collects his flat one percent fee, there’s pennies left over for the tenant.

So Attorney General Eliot Spitzer, with State Senator Frank Padavan and Assemblywoman Helene Weinstein, proposed a bill that would give owners 20 percent of the interest earned, rather than a straight percentage of the deposit. That way, owners will have an incentive to shop around for the few banks that offer higher interest rates, ultimately providing tenants with a better deal. According to Spitzer spokesperson Juanita Scarlett, some New York banks offer as much as 3 percent.

“Generally, this sounds great,” said Jenny Laurie of the Metropolitan Council on Housing, a tenant group. “It’s a great idea to make these accounts more productive.” But, she added, the Attorney General’s office is lax with the security deposit laws that already exist. Tenants constantly complain that at the end of the lease, landlords often refuse to refund deposits, or refuse to pay any interest at all, Laurie added. “The Attorney General’s office needs to do a better job of enforcing that law.”

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