As previously discussed (click here) the Louisiana Legislature was working on a bill addressing the requirements for handling and distributing insurance settlement payments to homeowners for damages to residential property caused by Hurricane Katrina or Hurricane Rita. 

The Bill has now been signed into law.

Louisiana Bill 4A and Senate Bill 31, twin bills that together create R.S. 6:337, were signed by the Governor on February 23, 2006.  Both are effective April 1, 2006.  These bills create a law that amends the requirements for handling and distributing insurance settlement payments to homeowners for damages to residential property caused by Hurricane Katrina or Hurricane Rita.  It also provide definitions for "Excess Funds" and "Settlement Proceeds." 
 
The new law requires that Mortgage Holders who receive an insurance Settlement Proceeds check jointly payable to the Holder and Borrower endorse the check and return any excess funds to the Borrower upon written request.  This must be done with 30 days after receipt of the written request. In addition all Mortgage Holders who receive Settlement Proceeds jointly payable to the holder and Borrower must place them in escrow accounts that earn interest payable to the Borrower/Claimant.

Mortgage Holders must return to the Borrower all Excess Funds held in escrow within the required time periods and calculate the amount as required. Failure to do so may result in a maximum penalty of $150.00 per day.  Penalties are due and payable on the day they are assessed.
 
"Excess Funds" are insurance proceeds that exceed the loan balance, calculated as of the 30th day following the date the mortgage holder receives the borrower's written request to release the funds, PLUS 6 months of future accrued interest calculated from the payoff date previously described.  Interest must be calculated according to the computation contained in the Mortgage Note.
 
For purposes of this law, "Settlement Proceeds" are funds of $25K or more paid on an insurance claim for damage to residential property caused by Hurricanes Katrina or Rita.  Interest is required to accrue after Settlement Proceeds have been held in escrow for more than 30 days.  Compliance with Fannie Mae or Freddie Mac servicing guidelines for payment of interest on property damage claim funds held in escrow by the lender or servicer is considered compliance with this law.
 
If the property can be repaired or replaced to the mutual satisfaction of the borrower and the mortgage holder, then any balance remaining in the escrow account plus interest must be paid to the borrower.  The mortgage holder must cooperate fully with the Borrower and the insurer to release the necessary funds in a timely manner to repair or replace the damaged property.
 
The new law applies equally to both state and federally chartered federally insured financial institutions (banks and thrifts) and their affiliates.
 
The Commissioner of  Financial Institutions has the power to draft and issue any rules and regulations necessary to implement this law, including procedures or clarifications. 
 
The impact is that effective April 1, 2006, any mortgage holder of Hurricane Katrina or Rita-damaged property must carefully monitor all insurance settlements involving Hurricane Katrina or Rita properties,follow the rules and implement procedures or otherwise face exposure to potential penalties for non-compliance.