What Happened?
Effective immediately upon enactment on August 29 as an urgency measure, California Assembly Bill 493 (2025 Cal. Stat. 103) (the “Bill”) requires financial institutions making or purchasing residential mortgage loans to pay interest on hazard insurance proceeds in a loss draft account pending the rebuilding or repair of property.
Why Does it Matter?
Previously, California law required a financial institution to pay interest on amounts held in escrow for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property. The Bill’s goal is to provide critical safeguards to protect wildfire victims by extending that requirement to loss drafts.
Specifically, the Bill adds new Section 2954.85 to the Civil Code, which imposes new requirements on financial institutions. The Bill defines the term “financial institution” broadly as “a bank, savings and loan association, or credit union chartered under the laws of [California] or the United States, or any other person or organization making loans upon the security of real property containing only a one- to four-family residence.”
The new section requires any financial institution that makes or purchases such loans and holds hazard insurance proceeds in a loss draft account pending property rebuilding or repair to pay interest on those funds at a rate of at least 2% simple interest per year. The financial institution must credit that amount to the draft account annually or upon termination of the account (whichever is earlier). Further, the financial institution cannot impose any fee or charge for the maintenance or disbursement of hazard insurance proceeds held in a loss draft account pending the rebuilding or repair of the collateral property, if such fee will result in payment of a lower interest rate on such hazard insurance proceeds.
A financial institution may place loss draft funds in an interest-bearing account in a federally insured depository institution, federal home loan bank, federal reserve bank, or similar institution.
For any funds a financial institution holds in a loss draft account as of the Bill’s effective date, interest must begin accruing on such funds as of that date. However, the requirement to pay interest on such accounts does not apply to any hazard insurance proceeds held in a loss draft account required under federal or state law to be placed by a financial institution (other than a bank) in a non-interest-bearing account.
The Bill also amends Section 50202 of the Financial Code, which otherwise governs the maintenance of client trust accounts, to reference the new Civil Code section’s requirements for loss draft accounts.
What To Do Now?
Lenders and purchasers of residential mortgage loans must ensure that any hazard insurance funds held in a loss draft account, pending the rebuilding or repair of the property securing the loan, began accruing interest at a rate of 2% per year as of the effective date of the new law. Further, given that it is common practice for the servicer who is acting as the agent of a “financial institution” to comply with the requirement regarding the payment of interest on escrow accounts, the same may become true for loss draft accounts; accordingly, servicers should be aware of the requirement.
