A new California law shakes up mortgage servicing, forcing lenders to pay interest on insurance proceeds held for property repairs. Are your processes ready for the change?
California now requires mortgage lenders and servicers to pay interest on hazard insurance proceeds held for repairs, reshaping how the industry manages disaster payouts.
Assembly Bill No. 493, sponsored by Assemblymember John Harabedian and Senator Sasha Renee Perez, was signed into law on August 29, 2025. The law took effect immediately and applies to financial institutions that make loans secured by one- to four-family residences in California or purchase obligations secured by such property.
Under the new law, when a financial institution holds hazard insurance proceeds in a loss draft account while a property is being rebuilt or repaired, it must pay at least 2 percent simple interest per year on those funds. The interest must be credited to the account annually or when the account is closed, whichever occurs first. The law further prohibits these institutions from imposing any fee or charge in connection with maintaining or disbursing hazard insurance proceeds that would result in an interest rate of less than 2 percent per year being paid on the funds.
The legislation allows financial institutions to deposit hazard insurance proceeds in an interest-bearing account at a federally insured depository institution, a federal home loan bank, a federal reserve bank, or another similar government-sponsored enterprise. However, the law does not apply to hazard insurance proceeds that are required by a state or federal regulatory authority to be placed by a financial institution other than a bank in a non-interest-bearing demand trust fund account of a bank.
For mortgage professionals, this means new compliance requirements. Lenders and servicers must ensure that all hazard insurance proceeds held in loss draft accounts for property repair or rebuilding accrue interest at the required rate. This is particularly relevant in California, where wildfires and other disasters have led to increased instances of insurance payouts being held pending repairs.
Assembly Bill No. 493 also amends Section 50202 of the Financial Code. It reinforces that escrow funds related to residential mortgage loans must meet all applicable state and federal requirements and be maintained in approved depository institutions. Trust funds collected in connection with mortgage servicing cannot be mixed with the lender’s own funds and are not subject to enforcement of a money judgment against the lender. The law also clarifies that a borrower is entitled to at least 2 percent simple interest per year on impound account payments covered by Section 2954.8 of the Civil Code.
For the mortgage business industry, these changes require updates to how loss draft accounts are managed and may affect policy clauses related to the handling of insurance proceeds. The law’s provisions are intended to ensure that interest is properly credited and that borrowers are not disadvantaged by unnecessary fees or delays.
Assembly Bill No. 493 was enacted as an urgency statute, with the stated purpose of providing safeguards and protecting wildfire victims and others from the withholding of interest on insurance payouts. The law aims to ensure fair treatment and financial security for those rebuilding their lives after property damage.
In summary, California’s Assembly Bill No. 493 introduces new requirements for mortgage lenders and servicers regarding the management of hazard insurance proceeds. The law is now in effect, and mortgage professionals should review their practices to ensure compliance.
