Fire Victims Ask: Who Earns Interest on Insurance Payouts?

Some homeowners say lenders are cashing in on their losses

What to Know

  • California law says mortgage holders should pay 2% interest to property owners on funds held for insurance purposes
  • Some North Bay fire victims say their mortgage holders are not making interest payments to them
  • State officials declined to take a position on how the law should be interpreted

This is a story about simple interest -- that gets complicated.

It begins with Gabe McCarthy's home in Santa Rosa. McCarthy says his house didn't stand a chance in the October 2017 wildfire that swept through his Coffey Park neighborhood.

"It looked like somebody dropped a bomb," McCarthy said. "It burned down, along with everything else around here.

Today, his house is finally looking like a home again. But construction only began earlier this year.

"It's probably been seven or eight months," McCarthy said.

He's faced several hurdles, and one surprise. When his property insurance paid the claim on his destroyed house, McCarthy didn't get the check. His mortgage company did.

"The purse strings are held by my lienholder, Mr. Cooper," McCarthy said.

Mr. Cooper is not a person. It's a mortgage servicing company. McCarthy says Mr. Cooper distributed his rebuilding money progressively, over the course of a year, at various stages of construction. That's a common practice, to make sure homeowners with mortgages rebuild. But, as hundreds of thousands of dollars of his insurance money sat idle, McCarthy wondered if it was earning any interest.

State law seems to indicate he might. A California Civil Code law states that when a mortgage holder receives money "...for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, [it] shall pay interest on the amount so held to the borrower... at the rate of at least 2 percent simple interest per annum."

McCarthy says Mr. Cooper did pay him for interest -- but at a rate of 0.1%.

"They had paid me about $22," he said.

McCarthy said he believes he's legally entitled to the full 2%, which he calculated to be about $5,300.

"When it's close to half a million dollars at one point, two percent really starts to add up," he said.

NBC Bay Area reached out to Mr. Cooper with McCarthy's concerns. The company declined to comment for this story, but McCarthy says he received his $5,300.  McCarthy says that will help with moving expenses.

"Every penny matters," he said.

It was a clear win for McCarthy, but the picture gets murkier a few miles away for homeowners Linda and James Frye. They also lost their home, had a mortgage, and expected two percent interest on more than $300,000 held by Quicken Loans.

"As much as I tried to get that two percent, they kept refusing," Mrs. Frye said.

The Fryes asked us to help. Quicken Loans didn't answer our questions. Instead, it sent a letter to the Fryes, stating it believes two percent interest is only required on traditional escrot for property tax and insurance premiums; not rebuilding money.

So, we have one state law, and two companies taking opposite views of it. For a tiebreaker, we contacted the California Department of Business Oversight, which oversees mortgage law. However, it told us the agency "...has not taken a position on whether [the 2% interest] applies specifically to insurance casualty/loss proceeds."

We asked if the Department of Business Oversight plans to take a position. It did not respond to our inquiry.

The lack of clarity on the issue infuriates the Fryes.

"Grow a backbone and make a decision, so everyone's on the same page," Mrs. Frye said. "We feel like the state needs to make a decision, and do something."

NBC Bay Area reached out to the association that represents mortgage companies, for its take. It did not get back to us.