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The California state legislature has approved a bill designed to protect homeowners who have lost homes to catastrophic events like wildfires. The legislation guarantees that homeowners, rather than lenders, will receive interest on insurance payouts that are held in escrow accounts during the rebuilding process. The measure now awaits Governor Gavin Newsom’s signature to become law.

Closing a Costly Loophole

Under the current system, insurance companies issue settlement checks made out jointly to homeowners and their mortgage lenders. Lenders often deposit these funds into escrow accounts, holding them until construction or repairs are complete—a process that can take months or even years. During this time, the money accrues interest, which lenders have traditionally kept.

The new law mandates that homeowners must receive at least 2% simple annual interest on those funds, ensuring they benefit financially while waiting for access to their insurance settlements. This applies not only to future claims but also to existing escrowed payouts once the law takes effect.

Inspired by Wildfire Survivors

Assemblymember John Harabedian, who authored the bill, was motivated by stories from his constituents in Los Angeles who struggled after January’s devastating wildfires. Many families reported that while lenders held their insurance payouts, they were left scrambling for money to cover rebuilding costs, temporary housing, and other urgent needs.

“If banks and mortgage servicers are holding on to homeowners’ money, the interest should go to the families who need every dollar to recover, not to the lenders,” Harabedian said. “We found that this wasn’t just a local problem—it was happening across the state.”

Backing From the Governor

Governor Newsom, who has voiced strong support for the measure, called it a “commonsense solution” that ensures financial fairness. “Homeowners rebuilding after disasters deserve every resource available,” he said when the bill was introduced earlier this year.

California law already required lenders to pay interest on escrowed property tax and insurance funds, but it did not specifically cover insurance settlement checks. This bill closes that gap, leveling the playing field for homeowners.

A Financial Boost for Rebuilding Families

The legislation could provide meaningful financial relief for thousands of California families still recovering from natural disasters. For example, an escrowed payout of $500,000 would generate at least $10,000 in interest over one year at the mandated 2% rate—a sum that could help cover living expenses, construction delays, or unforeseen rebuilding costs.

Lawmakers hope this new requirement will not only ease financial stress but also prevent lenders from profiting at the expense of disaster victims. “It’s unfortunate we need a bill to enforce fairness,” Harabedian added, “but this is about giving homeowners the support they deserve.”

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