California Per Diem Interest Requirements
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Per diem interest remains a frequent source of compliance risk for banks and mortgage lenders operating in California. Although per diem interest is a standard feature of residential mortgage lending, California law imposes strict limitations on when interest may begin accruing, how it must be disclosed, and when it may be collected. Enforcement actions by the California Department of Financial Protection and Innovation (DFPI) demonstrate that even technical missteps such as starting accrual too early by one day can result in borrower remediation, monetary penalties, and mandated corrective actions.
Regulatory Oversight and Common Issues
California’s DPFI issued six actions and orders on lenders in 2024 and 2025. Corrective actions required by the DFPI include:
| Description | Required Remediation |
| DFPI repeatedly found that a mortgage lender overcharged per diem interest in excess of one day prior to the disbursement of funds. DFPI initially found overcharges in the 2016 examination of the mortgage lender and order the lender to conduct a self-audit and refund borrowers for any overcharges. In 2020, DFPI found additional loans as part of a regulatory exam with a per diem interest overcharge. | Must pay borrower restitution identified through the self-audit, as well as penalty to DFPI. |
| DFPI found that a mortgage lender overcharged borrowers per diem interest. The lender previously had been cited for similar violations and failed to fully address or remedy these practices. The regulatory audits indicated that the lender had overcharged borrowers in several loan files, failed to provide proper refunds in a timely manner, and did not implement sufficient corrective actions. | Must refund overcharged interest to affected borrowers and engage in independent audits to ensure future compliance. Required to establish stronger internal policies and procedures to prevent future violations and is subject to oversight through periodic independent audits. |
| DFPI issued a consent order for a mortgage lender following a regulatory examination that revealed the company violated state lending laws by overcharging borrowers per diem interest prior to disbursement of loan funds. | Must refund overcharged interest to affected borrowers and engage in independent audits to ensure future compliance. |
| A DFPI exam found that a mortgage lender overcharged interest in excess of one day prior to disbursement for 25 percent of the loans reviewed.
DFPI also found that the lender did not maintain required documentation such as closing statement issued by an independent escrow holder; therefore, disbursement date to calculate per diem interest could not be determined. |
Must conduct a self-audit to identify borrowers for refunds for overcharges and provide borrower refunds with 10 percent interest. |
| DFPI determined through sample testing that a mortgage lender charged borrowers per diem interest for more than one day prior to the date loan proceeds were disbursed from escrow.
Additionally, the regulatory examination identified the following violations of the California Residential Mortgage Lending Act (CRMLA):
|
Must conduct a self-audit of all loans originated during the scope period to determine the number and amount of per diem interest overcharges.
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| A DFPI examination of a mortgage lender’s loan files found that 20 percent of sampled mortgages charged borrowers more than one day of prepaid interest before loan funding. | Must pay borrower restitution for the overcharge amount with 10 percent interest, as well as penalty to DFPI. |
Based on the regulatory actions, common issues for lenders include:
- charging interest two or more days before escrow disbursement when not applicable
- system-driven accrual dates that default incorrectly
- inconsistent per diem amount or calculation on the Loan Estimate and Closing Disclosure
- missing per diem calculation support
- lack of coordination between origination, escrow, and funding teams
Overview of California Per Diem Interest
Per diem interest is the daily interest charged on a mortgage loan for the period between loan funding and the borrower’s first scheduled monthly payment. It is typically collected at closing and disclosed on documents including the Loan Estimate and Closing Disclosure.
California law is designed to ensure that borrowers are not charged interest for periods when loan proceeds have not yet been disbursed or made available. As a result, California places stricter limits on accrual start dates than many other states. California requirements operate in addition to, rather than instead of, federal disclosure rules.
| Citation | Level | Overview of Per Diem Requirements |
| Truth in Lending Act (TILA) | Federal |
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| California Civil Code §2948.5 | State |
|
| California Financial Code §50204(o) | State |
|
Accrual and Collection Rules
For most California consumer mortgages, interest may accrue no earlier than one day prior to disbursement whether funds are released through escrow, recorded without escrow, or disbursed directly to the borrower or a third party. Accrual before this point is considered an improper charge, even if later refunded.
Lenders should ensure that their systems and processes use the actual disbursement date (funding date) rather than a closing or signing date. California released a revised No. 58-FS in May 2017 outlining documents that can be used as proof of compliance with the per diem statue. Evidence allowed includes:
- written or electronic communication between licensee and settlement agent verifying disbursement date of loan proceeds with name and business address of settlement agent
- contemporaneous written or electronic records memorializing oral communications between licensee and settlement agent verifying disbursement date of loan proceeds and identifying name and telephone number of settlement agent
The release also notes in a frequently asked question that since a Closing Disclosure is an estimate, additional proof is required (such as a Final Settlement Statement or wire transfer confirmation) to corroborate the disbursement date for the majority of funds. If disbursement is dated after the date the final settlement statement was prepared, additional evidence is required to confirm that the disbursement date is correct.
Additionally, lenders should review specific loan types (e.g., Federal Housing Administration, Veterans Affairs, US Department of Agriculture loans) as the extra days’ interest allowed to be charged to the borrower may differ.
Conclusion
Although enforcement actions have decreased from a federal perspective due to the reduction of regulatory agencies such as the Consumer Financial Protection Bureau, state agencies such as DFPI continue to focus on lender inaccuracies and borrower harm, including inaccurate per diem interest calculation. As there is an increased push in home sales’ targets, fines and penalties continue. Therefore, the cost avoidance associated with cutting corners to make a sale can ultimately end in the red.
BRG professionals have decades of experience working with lenders to remediate mortgage origination issues from marketing and advertising to secondary. We are ready to assist in areas such as implementing proactive governance, developing strong internal controls, evaluating and creating efficiencies in process, providing nearshore support, and testing.
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