Using damage deposits as a loan pool

[dwohl at TSO.UC.EDU]

Last week someone suggested using tenant damage or security deposits as a
loan pool.

Speaking as a reformed lawyer, now a lender, I find this troubling. The
deposits are the property of the tenant, and the landlords are essentially
holding them in trust. Unless the tenant damages the premises, or
stiffs the landlord on rent, the tenant is entitled to a return of the
deposits.

The trouble arises when there are defaults on the loan. That reduces the
total pool of security deposits, and who bears the loss? The tenant
certainly should not have to.

A variation on the idea is to fund a loan pool from the INTEREST on tenant
deposits. I think that Oregon (all you Oregonians can correct me if I'm
wrong) funds a state housing trust fund from tenant security deposits.
In most states, tenants don't get the interest on deposits, so there is
no breach of any duty to the tenant by using the interest to fund a loan
pool.

David Wohl, Cincinnati Development Fund
dwohl@tso.uc.edu


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[wlm4 at cornell.edu (Will]

> I find this troubling. The
>deposits are the property of the tenant, and the landlords are essentially
>holding them in trust. Unless the tenant damages the premises, or
>stiffs the landlord on rent, the tenant is entitled to a return of the
>deposits. The trouble arises when there are defaults on the loan. That
reduces the
>total pool of security deposits, and who bears the loss? The tenant
>certainly should not have to.

You're right that the tenant should not have to bear the risk of default, as
he doesn't. In the directed deposit programs I have seen, the issues of
interest rate, deposit insurance, loan underwriting, loan default risk and
others are negotiated as a part of the initial deposit agreement.

Woodstock Institute (Chicago 312-427-8070) has done an excellent of targeted
public deposits.

Here are some examples of the programs we have designed:

- An umbrella for conservation land trusts encourages members to deposit
money in our Credit Union. Those deposits are matched (in rate and term) to
loans to owners of property who are deeding portions to the trust. The loan
funds insure that the land will not be unsalable because financing is not
available. Risk of default is the Credit Union's,

- A bail fund is established to provide funds to get petty criminals out of
jail, pending trial (The poor man sleeps in jail, the rich man walks).
Supporters of the Fund make deposits at the Credit Union and receive
reduced deposit rates. The reduced rate is carried to a loan to the Bail
fund. Default on the loan is a risk to the Credit Union. Default on the
bail bond is a risk of to the benefit of the loan fund.

- NYS Urban Development Corporation makes a reduced interst deposit in our
Credit Union. We lend the funds to minority and low income businesses at a
similarly reduced rate. Risk of loan default is the Credit Union's.

- Partners for the Common Good makes a deposit in our Credit Union, long
term, reduced interest rates. We re-lend this money to home buyers who do
not quality for secondary market loans, but who do meet our Flexible Mortage
standards. Benefit of reduced rate to the Credit Union, loan default risk
to the Credit Union.



************************************************** **********
William Myers
Alternatives Federal Credit Union
301 West State Street, Ithaca, NY 14850-5431
Voice (607) 273-3582 ext 817 FAX 277-6391
E-Mail Alternatives-Myers@Cornell.edu
************************************************** **********



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