Lawmakers can’t stop meddling with security deposit accounting and tenant screening

We’ve been investing some time lately in educating the community of rental housing providers about AB 12, a law relating to security deposits that takes effect July 1, 2024, and is codified as Civil Code section 1950.5. With certain exemptions for small landlords, security deposits will be limited to one month’s rent for both furnished and unfurnished units.

Download a one-page flowchart on new security deposit accounting rules →

Before the ink could dry on the new law, another bill (AB 2785) was introduced and has progressed to the Assembly floor that would add a new responsibility for landlords to place security deposits in a bank account within 30 days of receiving it. At the end of the tenancy, tenants would be entitled to the return not only of the security deposit but any interest that has accrued.

After some haggling, the bill’s author, Assembly member Lori D. Wilson of Suisun City, conceded by amending the bill to make optional, and not mandatory, that the account be interest-bearing.  Under this change, if no interest is accrued, housing providers need only return the unused deposit.

The language about optionality appears to be imprecise. We believe it considers the fact that some banks might not pay interest on these accounts, and does not give the landlord any right to opt out and thereby render pointless this portion of this legislation.

More concerning to us are the proposed changes to tenant screening fees.

Finding excellent tenants is daunting enough, but it would be costlier under the bill floated. 

Tenant screening is a critically important aspect of landlording and this comes with an expense. During the vetting process, housing providers cannot profit from tenant screening fees but they can recover the actual, direct expenses attendant to obtaining information on the rental applicant, as well as the time invested by owners and their staff in this application process.

A 1996 law capped screening fees at $30 per applicant, with allowances for rising costs of living and so naturally, the allowable fees have gone north. For 2024, the maximum tenant screening fee is $62.02 and this takes into account inflation.

AB-2785, though, would cap rental application fees at a flat $50, irrespective of rising costs and the energy spent in properly fielding prospective renters. It doesn’t end there.

If the bill comes to pass, rental applicants who are turned down must be refunded the fee they paid if certain circumstances exist. That’s right - after spending money to evaluate the excellence of a potential tenant, landlords would have to return any money used in tenant screening to the denied applicant.

Takeaways and parting thoughts

With rising costs such as PG&E bills, garbage removal companies charging more, contractors in high demand asking for more money, and other costs going upwards, this is a bad bill that will only ratchet up expenses.

Whether the legislation passes or not, now is a good time to review your policies on tenant screening. Bar none, the greatest determinant of a successful rental relationship is the proper selection of a tenant.

Selecting an ideal tenant is part art, part technology, and part knowledge of the law, and we delve deeper into it here.