CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2003 No.16
December 17, 2003

Vol 2003 No. 16 December 17, 2003

State Mortgage Interest "Per Diem" Law Amended

A bill supported by CBA, AB 313, improves upon a law governing the ability of home mortgage lenders to charge interest prior to closing, referred to as the "per diem" interest laws. Under existing Civil Code Section 2948.5, a residential lender in California is not permitted to charge a borrower interest for more than one day before a loan is recorded.

The existing law also permits a lender to charge interest as of the business day prior to recording if two conditions are met. The borrower must request that the recording will occur on a Monday or a day immediately following a bank holiday. If the lender approves, then it must disclose the amount of additional interest charged and the fact that the borrower may avoid the additional interest by closing the transaction on another day. Under these conditions, the lender may begin to charge interest as of the Friday before a Monday closing, or the business day before a holiday for a post-holiday closing. For closings on other days, interest may commence no earlier than one day before recording.

AB 313 amends Section 2948.5 by changing the trigger date to the date that funds are disbursed from escrow rather than the recording date. Thus, normally, interest may begin to accrue one day before disbursement. A similar amendment is made to the law (Financial Code section 50204) governing licensees of the Department of Corporation operating under the California Residential Mortgage Lenders Act.

As a practical matter, California lenders attempt to have funds disbursed from escrow as close in time as possible, usually on the same day, that a mortgage or deed of trust is recorded in a county office. Therefore, the impact of the amendment will be to prevent lenders from losing interest on disbursed funds due to a recorder's lateness in recording a document.

The legislative analysis acknowledges that the existing law is based on the erroneous assumption that recording of the security instrument is tantamount to disbursement from escrow, and that borrowers do not enjoy the benefit of funds prior to recording. The result is that under a strict reading of the law, a lender could be denied interest even after the borrower has full use of the loan proceeds. If recording is delayed by the recorder's office, this disadvantage may last for days, perhaps even weeks. The California Department of Corporations has actively acted against its licensees for violations of the per diem laws.

The existing per diem laws were successfully challenged in federal court in the case, Wells Fargo Bank v. Boutris, based on federal preemption under the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). The court held that the per diem statutes are preempted as to federally related mortgages because they limit the rate or amount of interest on mortgages secured by a first lien on residential property. (Loans secured by secondary liens are not preempted under DIDMCA).

In addition, a preemption of state and local laws and regulating mortgage lending is available as to federally chartered savings associations by Office of Thrift Supervision regulations issued under the Home Owners Loan Act.

If you have any questions, you may contact Douglas White, CBA's lobbyist on AB 313, at 916-441-7377 x211, or Leland Chan, General Counsel at 415-284-6999 x214.