If you sign your loan documents on Monday, based on a closing set for Tuesday but a problem with the sale delays the sale for a week, who pays the interest on your mortgage until the sale goes through? That question has been answered by the California legislature, which approved a law preventing lenders from charging mortgage interest for more than one day prior to disbursement of funds from escrow.
No one plans problems with a property sale. Everyone involved does their best to identify the closing date far in advance of the actual closing. The timing is important because, among other things, the buyer’s lender needs to know when to send the mortgage funds into escrow. It aims for as close to the closing date as possible. If it sends the money in too late, the sale will be delayed. If it sends the money in too early, it will just be sitting in an escrow account unused.
Is This an Issue?
Banks want to charge borrowers from the day the mortgage funds leave the vault. That might be fair if the borrower had complete control over the escrow process. But, of course, he doesn’t. Delays can appear from every front--the seller, the real estate agents, the escrow company, the local building department. A number of states believed the issue important enough to pass legislation to limit when banks could start charging interest.
Different states identified thresholds and points at which banks could start charging interest. In some states it is at or a day or two before the deed is recorded. In California, it is no more than one day before the funds are dispersed from the escrow account. When the funds leave the escrow account, they go directly to the seller and/or seller’s lienholders.
Despite what the law requires, lenders don’t always abide by the rules. The California Department of Corporations enforces the per diem mortgage interest law. It has had to take more than one lender to court to enforce the law.
- Onecle: California Civil Code Section 2948.5
- The Seattle Times; Timing Is Critical When Disbursing Escrow Funds; Tom Kelly; March 1994
- Gordon Feinblatt: Should You Stop Collecting Odd-Days and Perdiem Interest at Closing; Carla Stone Witzel; January 2006
- Consumer Financial Protection Bureau. "§ 1024.17 Escrow Accounts." Accessed Sept. 13, 2020.
- North Carolina Real Estate Commission. "Questions and Answers on: Earnest Money Deposits." Accessed Sept. 13, 2020.
- South Carolina Association of CPAs. "SCDOR’s Online State Tax Lien Registry Launches on Nov. 1." Accessed Sept. 13, 2020.
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.