BILL ANALYSIS C.S.H.B. 3028 By: Ehrhardt 4-28-95 Committee Report (Substituted) BACKGROUND Landlords may do anything they wish with tenants' security deposits. Texas law does not require them to protect, segregate, or pay interest on the funds. Foreclosing mortgagors and trustees in bankruptcy, as judgment-proof landlords, are not obligated to returning the tenant's deposits. Thus, many Texas tenants lose their deposits to failed landlords each year. There is also no specific requirement that an application deposit should be returned within a reasonable time after rejecting a prospective tenant, or any limitation on how long a landlord may hold a deposit while the application is being considered. A search for housing can be disrupted indefinitely by a delay in the return of these deposits. PURPOSE This bill would require landlords to protect the security deposits of their tenant in trust as a fiduciary on behalf of the tenant and prohibits commingling of security deposit funds with the assets of the landlord. The bill protects these funds from a creditor, trustee in bankruptcy or foreclosing mortgagee. This bill also requires application deposits to be returned within a time certain after the rejection of the tenant's application to lease. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 92.102, of the Property Code as follows: (a) Excludes application deposits from the definition for security deposit. (b) Establishes that a tenant's security deposit is the property of the tenant. (c) Creates a fiduciary relationship between the landlord and tenant as relates to the security deposit. SECTION 2. Amends Subchapter C, Chapter 92 of the Property Code by adding Sec. 92.1021: (a) Prohibits commingling tenant's security deposits with assets or other funds of the landlord, permits commingling of same deposits with those of other tenants. (b) Requires that the landlord maintain these deposits in such a way that: (1) the funds are protected from the claim of the landlord's creditors, a foreclosing mortgagee or a trustee in bankruptcy; and (2) allows for transfer to a subsequent owner. SECTION 3. Amends Sec. 92.102(c), Property Code, as follows: Places the tenant's claim to the security deposit funds above that of a trustee in bankruptcy. SECTION 4. Amends Subchapter C, Chapter 92 of the Property Code by adding Sec. 92.1041: Creates the presumption of a timely deposit refund when it is postmarked by the required date. SECTION 5. Amends Sec. 92.109 by adding Subsection (e) as follows: (e) Landlords who violate section 2 above: (1) forfeit the right to withhold from the security deposit (2) are liable to the tenant for damages, fees and court costs, and (3) may be enjoined from future violations in suit. SECTION 6. A new subchapter H is added to Chapter 92 of the Property Code and entitled "RENTAL APPLICATION DEPOSITS" Sec. 92.331 Definitions Sec. 92.332 If the landlord does not give notice of acceptance to a prospective tenant within seven days after completing an application form or tendering an application deposit, the applicant is deemed rejected. Sec. 92.333 This section sets time limits for the return of application deposits to applicants after the time of their rejection. (a) Certain negotiable instruments must be return within one day if that item has not been deposited. (b) Cash must be returned within seven days. (c) Deposits must otherwise be returned within fourteen days after rejection, unless otherwise agreed to in writing, and (d) Such and agreement may not exceed thirty days. Sec. 92.334. Establishes procedures for notice of rejection to the applicant by phone or mail, provides that refunds may be made by mail or be made available in the office of the landlord and stipulates that, upon request by the applicant, the landlord must mail a refunded application deposit. Excludes weekend or holidays from the calculation of applicable days in this Subchapter. Sec. 92.335 Establishes a penalty under this Subchapter $100 plus three times the application deposit amount and reasonable attorney's fees in a suit to recover. SECTION 7. This Act would become effective on January 1, 1996. This Act would require compliance only for security deposits or application fees received from tenants after the effective date of the act. Establishes that a landlord who has accepted application funds prior to the effective date, but has not rejected the applicant is presumed to have rejected the applicant within seven days after the effective date of this Act. SECTION 8. Emergency Clause. COMPARISON OF ORIGINAL TO SUBSTITUTE SECTION 1. The substitute bill removes from this section all considerations other than clarifications concerning the ownership and treatment of the security deposit. Like the original bill, the substitute establishes that the security deposit is the property of the tenant to the extent that the landlord has not made lawful deductions, and this language requires that the landlord hold the deposit in trust as a fiduciary on behalf of the tenant. All references to deposit accounts, interest on the deposit accounts and the Texas Department of Housing and Community Affairs as a beneficiary of interest is removed. The exclusion of landlords who lease less than three dwellings is removed. SECTION 2. This is a new section of the substitute that makes reference only to provisions of the original bill concerning commingling of security deposits with the landlords assets, protection of the assets from the landlords creditors and transfer to subsequent owner. The notification requirement concerning the location of the deposit is removed. SECTION 3. This is a new section which places the claim of a tenant to a security deposit above that of a trustee in bankruptcy, as did the original bill. SECTION 4. This is a new provision that a landlord may be presumed to have refunded deposits or made accounting of deductions by placement in the U.S. mail. SECTION 5. This new section covers penalties and civil recourse of the tenant against a noncompliant landlord. These are the same as those in the original bill. SECTION 6. This section creates a new Subchapter H, under Chapter 92, Property Code, entitled "RENTAL APPLICATION DEPOSITS." This portion of the bill is substantially similar to that portion of Section 1 in the original bill which covered deposits of applicants. The substitute extends the automatic rejection period from six to seven days, changes the period for return of applicant funds from the fifth business day after rejection to: one day after rejection is by check and the check was not deposited, seven days after rejection if the deposit was made in cash, fourteen days after rejection if the deposit was made by check and it was deposited prior to rejection. SECTION 7. The effective date of the Act is moved to Jan 1, 1996 from September 1, 1995 and deposits taken prior to the effective date are "grandfathered." SUMMARY OF COMMITTEE ACTION The Business and Industry Committee considered H.B. 3028 in a public hearing on April 25, 1995. The committee considered a complete committee substitute to H.B. 3028. The committee substitute was withdrawn without objection. The following witnesses testified in favor of H.B. 3028: Fred Fuchs, representing himself; Katherine Stark, representing Austin Tenants Council; Robert Doggett, representing Legal Services of North Texas; Dorothy Masterson, representing Housing Crisis Center; Pamela Brown, representing herself; Yasmin Thomas, representing Texas Tenant's Union. The following witnesses testified against H.B. 3028: Joe Sharp, representing Texas Apartment Association; Larry Niemann, representing Texas Apartment Association. The following witnesses testified on H.B. 3028: J. Raymond Schiflett, III, representing University of Texas at Austin Students' Attorney Office; Kelly Rodgers, representing Texas Bankers Association. H.B. 3028 was left pending before the committee. H.B. 3028 was reconsidered by the committee in a formal meeting on April 28, 1995. The committee considered a complete committee substitute to H.B. 3028. Three (3) amendments were offered to the substitute. Committee amendment #1 was adopted without objection. Committee amendment #2 was adopted by a record vote of 5 (five) ayes, 4 (four) nays, 0 (zero) present-not-voting, 0 (zero) absent. Committee amendment #3 was adopted by a record vote of 8 (eight) ayes, 1 (one) nays, 0 (zero) present-not-voting, 0 (zero) absent. The committee substitute, as amended, was adopted without objection. The Chair instructed the staff to incorporate the amendments into the substitute. H.B. 3028, as substituted, was reported favorably with the recommendation that it do pass and be printed, by a record vote of 8 (eight) ayes, 1 (one) nay, 0 (zero) present-not-voting, 0 (zero) absent.