By Michelle Rodriguez, Esq.

On August 29, 2025, Assembly Bill 493 was signed into law and took effect immediately. The new law requires certain financial institutions to pay 2% annual interest on hazard insurance funds held in “loss draft accounts.”

Who is Covered?

California Civil Code § 2954.85 applies broadly to “financial institutions,” defined as any person or organization that makes or purchases loans secured solely by a one-to-four-unit residential property (not mixed-use).

Key points include:

  • Exemption: Financial institutions (other than banks) that are already required by regulators to place insurance funds into a non-interest-bearing trust account are exempt. (§ 2954.85(d))
  • Authorized Accounts: Covered institutions may deposit hazard insurance proceeds into an interest-bearing account with a federally insured depository institution, a Federal Home Loan Bank, the Federal Reserve, or another government-sponsored enterprise. (§ 2954.85(e))

What Triggers the Obligation to Start Paying Interest?

This law applies when a lender holds insurance funds in connection with property damage, pending repair or rebuilding.

What is Required?

  • Mandatory Interest: Lenders must pay borrowers 2% per year on funds in a loss draft account. (§ 2954.85(a))
  • Crediting: Interest must be credited at least annually, or when the account is closed.
  • Effective Date: For funds already held as of August 29, 2025, interest begins accruing from that date. (§ 2954.85(f))
  • Fee Restrictions: Lenders cannot impose maintenance or disbursement fees that reduce the interest rate below 2%. (§ 2954.85(b))

What Should Lenders Do Now?

Private lenders should promptly review whether they:

  1. Make or purchase loans secured by one-to-four-unit residential properties;
  2. Hold hazard insurance proceeds for repair or rebuilding; and
  3. Fall under the exemption for non-bank financial institutions required to use non-interest-bearing trust accounts.

If not exempt, lenders must begin paying 2% annual interest on any held insurance funds.

Disclaimer: The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.

Michelle Rodriguez is a Partner at Wright Finlay & Zak. She can be reached at mrodriguez@wrightlegal.net.