California law sends loss draft interest straight to borrowers
AB 1278, authored by Assemblymember John Harabedian, changes that. Lenders must now offer borrowers the option of receiving interest payments directly – by check, electronic funds transfer including ACH, or another payment method the borrower agrees to.
The law builds in a practical safeguard. If a borrower does not cash an interest check within 90 calendar days of delivery, the check is canceled at no cost to the borrower and the money is credited back to the loss draft account. The statute defines “check” narrowly: a cancelable draft drawn on a bank and payable on demand. Cashier’s checks and money orders do not qualify.
The 2% interest floor is protected, too. Lenders cannot tack on any fee or charge related to maintaining or disbursing loss draft funds that would effectively push the interest rate below that threshold.
The law’s definition of “financial institution” is broad – banks, savings and loan associations, credit unions chartered under state or federal law, and any other person or organization making loans secured by one-to-four-family residential property. The one carve-out: proceeds that a state or federal regulator requires a non-bank to hold in a non-interest-bearing demand trust fund account at a bank.
For funds already sitting in loss draft accounts when the law takes effect, interest starts accruing on the effective date.
