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      Are lenders required to pay interest on loan funds or borrower’s funds placed in an escrow account?

      First, as to interest on loan funds, GoDocs is not aware of any California law requiring the lender to pay interest on its own funds placed in such an escrow (deposit) account in connection with a commercial (business purpose) loan. For the sake of argument, if that were the case the law would seemingly be requiring the lender to pay the borrower for the privilege of providing him/her with such a loan. 
      Second, as to interest on borrower’s funds, specifically, funds the lender receives from the borrower in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, e.g., imposition deposits, the applicable law, California Civil Code § 2954.8, requires the lender pay “at least 2 percent” simple interest on the escrowed amount. However, that requirement applies to loans secured by a “one-to-four-family residence.”
      It is our understanding that a “one-to-four family residence,” as used therein, means a one-to-four-unit owner-occupied property. Our system does not prepare loan documents further to a loan transaction where the mortgaged property is such; GoDocs only prepares loan documents for non-owner-occupied loan transactions. As such, this interest requirement would not apply.
      Relatedly, 2025 CA AB 493 recently added to the California Civil Code a new section, § 2954.85, to address issues concerning property owners following the recent California wildfires.
      In that Bill, now law, lenders must now pay interest on hazard insurance proceeds held for repairs to the property. However, that law similarly applies to loans secured by “one-to-four family residences.” Given the legislature’s intent with 2025 CA AB 493 to address disaster payouts to residential property owners, but, importantly, its same use of “one-to-four family residences” in the law’s text and cross-reference to § 2954.8, it is our understanding that this is contextual evidence that § 2954.85, and by extension § 2954.8, both are only intended to benefit owners who live on the mortgaged property.
      Until such time as a case interprets those laws otherwise, GoDocs continues to rely on the common market understanding in California that those laws only apply to loans which our system does not document, i.e., residential (consumer) loans or commercial (business purpose) loans secured by owner-occupied property. For these reasons, we believe our language in the loan agreement and repair holdback agreements complies with California law.

      References in Loan Agreement D.4.(b):
      D.4. Deposits for Taxes, Insurance and Other Charges.

      (b)     Imposition Deposits shall be held by Lender or in a bank, credit union or other financial institution designated by Lender. Lender shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred which, if it is amenable to cure, has not been timely cured. Unless applicable law requires, Lender shall not be required to pay Borrower any interest, earnings or profits on the Imposition Deposits. As additional security for all of Borrower's obligations under this Loan Agreement and the other Loan Documents (other than the Environmental Indemnity and any Guaranty), Borrower hereby pledges and grants to Lender a security interest in the Imposition Deposits and all proceeds of, and all interest and dividends on, the Imposition Deposits. Any amounts deposited with Lender under this section D.4 shall not be trust funds, nor shall they operate to reduce the Indebtedness, unless applied by Lender for that purpose under section D.4(e) below.

      (a)     Concurrently with funding of the Loan, HOLDBACK AMOUNT (US $__.00) of the proceeds of the Loan (the "Holdback Amount") shall be disbursed by Lender to a general ledger account (the "Account") held by Lender. Borrower hereby grants to Lender a first priority lien and security interest in the Account, the funds therein, and the proceeds thereof, to secure performance by Borrower of all of Borrower's obligations under and with respect to the Loan, including without limitation the obligations under this Agreement. In the event of an Event of Default by Borrower under or with respect to the Loan, including without limitation a default by Borrower under this Agreement, Lender shall have, in addition to all of the remedies provided in all of the other documents evidencing and securing the Loan, all of the rights of a secured creditor under the Uniform Commercial Code with respect to the Account and the funds therein and the proceeds thereof, and Lender may apply the funds therein and proceeds thereof to the outstanding balance of the Loan.

      (b)     The Account shall not bear interest. At Lender's option the Account may be a book entry account with no obligation on the part of Lender to segregate the Account from Lender's other funds or assets. Notwithstanding the disbursement of the Holdback Amount to the Account rather than to Borrower, the entire amount of the Loan (including the Holdback Amount) shall be deemed fully disbursed to Borrower for purposes of determining interest accrued and payments due under the Loan. Lender's nonrefundable loan fee based on the full Loan amount shall be payable upon the funding of the Loan.

      (c)     At such time that Lender is satisfied that Borrower has timely completed all of its obligations under this Agreement, Lender shall disburse to Borrower all of the funds in the Account; provided that at Lender's option Lender may make disbursement directly to the applicable contractors, laborers, and materialmen. Such disbursement shall extinguish the security interest in the Account, but shall not otherwise constitute a waiver by Lender of any of its rights or remedies and shall not excuse Borrower from any of its obligations under or with respect to the Loan or this Agreement.