Current California law requires lenders to pay homeowners interest on escrowed property taxes and insurance, but it does not extend this requirement to insurance claim payouts held in escrow. (Credit: Pierce/Adobe Stock)
The California state legislature has passed a bill that will ensure homeowners affected by disasters receive at least a portion of interest from insurance payouts. Governor Gavin Newsom announced his sponsorship of the legislation in February in the wake of January's Southern California wildfires.
Following large losses, insurance companies typically send claim payout checks jointly made out to both the policyholder and the mortgage lender. The claim check is then deposited into an escrow account where it earns interest that, under current law, the lender could keep.
“Homeowners, not insurance companies, should receive the interest earned on their insurance payouts. Many Angelenos devastated by these wildfires have lost nearly everything; they are struggling and need every bit of financial support. This bill puts people over profits, ensuring that rightful insurance payments go to those who need them most,” Harabedian explained in a release.
In a release about the bill in February, Newsom’s office explained that current California law requires lenders to pay homeowners interest on escrowed property taxes and insurance, but it does not extend this requirement to insurance claim payouts that are held in escrow. The new bill, authored by Assemblymember John Harabedian, will amend this state law to explicitly require lenders to pay homeowners at least 2% interest on escrowed post-loss insurance payouts.
“If the homeowners are not given their money right away, the interest on that money, which the banks and the mortgage lenders are holding onto and earning [interest on], should be paid to the homeowner, not the banks,” Harabedian told CNBC. “The more we looked into this, the more we realized that this was a huge problem across the board.”
Next, the bill will head to Governor Newsom’s desk to be signed into law.
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