How Banks May Profit Off California Fire Victims – And Why Reform Is Needed
In the wake of devastating fires in California, many homeowners find themselves navigating not only the loss of their homes, but also a legal landscape that seems to favor financial institutions. These victims should review a critical case in California, Gray v. Quicken Loans, which highlights the hidden ways banks may profit off fire victims, and it’s a wake-up call for homeowners with mortgages in California.
The Case of Gray v. Quicken Loans
William Gray, a prior victim of the California Fires in 2018, lost his home and received a significant insurance payout to rebuild. However, he discovered a troubling issue: his mortgage lender held the insurance funds, a significant amount of money, but didn’t pay him any interest on the money while it sat unused. While it is normal for lenders to hold funds and disburse in chunks as the rebuild moves forward, the question this case raised is more about the potential money being earned on interest the money could be earning over this period.
At the heart of this issue is California Civil Code § 2954.8, which requires lenders to pay at least 2% interest on funds held in escrow for property taxes or assessments. But here’s the catch—the law is silent on insurance proceeds. This omission allowed the court in Gray v. Quicken Loans to side with the lender, ruling that due to the plain language of the state statute where it do not explicitly list “insurance proceeds,” there’s no legal obligation required by the state for the bank to disburse interest on insurance payouts, unless it is explicitly stated in the loan agreement. I am not sure how often lenders and banks agree to this in loan agreements, but I would be surprised to see it in closing documents.
In addition to that, while some banks and lenders might forbear obligations for monthly payments, the interest on this principal does not simply get omitted from the borrower’s financial obligation, and most of the time just pushed down the road. Unlike deferment, interest continues to accrue during any period of forbearance. This situation feels a bit like double-dipping—lenders earning interest on the loan and the insurance proceeds while potentially are in control of the speed of disbursement of the funds with a financial interest to hold them…just a little bit longer.
A Better Model: Colorado’s Pro-Homeowner Statute
Contrast California’s approach with Colorado’s statute, Colo. Rev. Stat. § 38-40-106, which directly addresses how mortgage servicers must handle insurance proceeds. Here are the key provisions from the statute:
Mortgage servicers must promptly disclose the conditions for disbursing insurance payouts.
Homeowners create a repair or rebuild plan with their contractor, which the servicer must approve or deny within 30 days.
For payouts under $40,000, the servicer must disburse the entire amount to the borrower in one payment.
For payouts over $40,000, at least $40,000 or 33% of the total must be released upfront, with the remaining funds tied to progress milestones.
Section (2)g is the most important part, and it requires that “A mortgage servicer shall hold in an interest-bearing account any insurance proceeds that the mortgage servicer does not immediately disburse” and “A mortgage servicer shall ensure that any interest that is credited to the account is credited and disbursed to the borrower.”
The game changer: Colorado law requires any held insurance proceeds to be placed in an interest-bearing account, and the interest earned must be credited back to the borrower. This ensures homeowners benefit financially, even while the funds are temporarily held.
Think about it this way: if your house did not burn down, any increase in the value of your home (its appreciation) would belong to you as the homeowner. Now imagine if the bank or lender suddenly claimed that any investment returns generated by your home's increased value over the same period were theirs to keep. You’d probably be outraged—and rightfully so.
Now, here’s how this ties into the insurance proceeds. When your house burns down, the value of the home’s improvements (the physical structure) is essentially liquidated into cash through the insurance payout. That cash represents the value of your home, which was collateral for the bank’s loan, but just because the home’s value is converted to liquid funds doesn’t mean the bank should be the one to earn investment returns from it and essentially be able to profit from it.
Yet, that’s exactly what can happen when insurance proceeds sit in the bank’s escrow account waiting for inspections and contractor invoices, right now in California they are potentially able to earn interest which the bank just keeps for itself. This is effectively the bank profiting off the liquidated value of your home, while you—the homeowner—are stuck waiting for their approval to use the money to rebuild your life. The bank already earns interest on the loan principal; profiting from the insurance funds, which represent your property’s value, is like taking a cut of your home’s investment returns over the period it is being rebuilt in, without any real justification. It’s unfair and to me feels like financial double-dipping.
How California Falls Short
California’s failure to address or explicitly list insurance proceeds in Civil Code § 2954.8 leaves fire victims vulnerable. The law allows lenders to hold onto insurance payouts, earn interest on the funds, and keep that interest for themselves. This creates an incentive for delays in disbursement, as banks profit while homeowners wait for inspections or approvals to rebuild.
The Real-World Impact
The financial implications are staggering. Consider a scenario, as just an example, where insurance companies pay out $2.5 billion (just a portion of what the liabilities look like) in claim proceeds which is then held by the bank for over two years. If banks earn 5% interest annually on these funds, that’s $100-200 million in profit—money that will go straight to the banks and financial institutions, while they may still charge you interest on your principal debt, even during forbearance. This money could be used to help victims rebuild their homes and lives.
In states like Colorado, homeowners would at least receive the interest on these funds, reducing their financial burden. In California, the banks keep it all!
What Can Be Done?
This issue underscores the urgent need for reform in California. Legislators should take inspiration from Colorado and amend the law to require:
Insurance proceeds held by mortgage servicers to be placed in interest-bearing accounts.
Interest earned on those funds to be credited back to the borrower.
These changes would ensure fairness and prevent banks from profiting at the expense of disaster victims.
What Homeowners Can Do Now – (Not Legal Advice)
Until reform happens, California homeowners should:
Consult an attorney licensed to practice real estate law in California: If you’ve experienced a loss, legal guidance can help you navigate your rights and ensure you’re not taken advantage of.
Call your State Representative: Call you state legislative representative and demand a change to the California Civil Code.
Final Thoughts
The Gray v. Quicken Loans case highlights a systemic issue in California law that disproportionately benefits banks. With billions of dollars now at stake, it’s crucial to push for legislative changes that protect homeowners and ensure fair treatment during the rebuilding process.
If you live in Nebraska and have a legal question, feel free to contact us. We’re committed to fighting for justice and holding financial institutions accountable. If you’re facing challenges with your insurance proceeds or mortgage lender and live in Nebraska, don’t hesitate to reach out.
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