Federal Preemption Fight Threatens Escrow Interest in 14 States
Ten state attorneys general sued the Office of the Comptroller of the Currency on Tuesday to block two rules that allow federally regulated banks to stop paying interest on mortgage escrow accounts. The rules, issued in May and effective June 18, permit national banks and federal savings associations to determine escrow terms without regard to state laws that mandate interest payments. Fourteen states and territories currently require lenders to pay interest on the balances homeowners maintain to cover property taxes and insurance premiums. The lawsuit, filed in U.S. District Court in Oregon, names the OCC and Comptroller Jonathan Gould as defendants.
About 80 percent of mortgage holders maintain escrow accounts that carry significant balances throughout the year because property tax and insurance bills are paid annually or semiannually, not monthly. The average annual property tax bill for owner-occupied homes reached $4,271 in 2024, and homeowners insurance is projected to average $3,057 by year-end. Interest rates on escrow balances vary by state: Rhode Island requires lenders to match regular savings account rates, while Maryland pegs the rate to one-year Treasury yields. At current rates, a $5,000 escrow balance could earn $31.50 annually in a state requiring savings-account parity or $200 in a state tied to Treasuries.
State-chartered banks are not directly bound by the OCC rules, but some states have wild-card statutes that grant them parity with national banks’ regulatory freedoms. The plaintiffs argue the OCC exceeded its authority and cite legal precedent supporting states’ role in consumer protection. Conflicting court decisions in different federal circuits mean banks may adopt different practices depending on their operating jurisdictions. Whether federally regulated lenders will immediately cease interest payments remains uncertain, according to financial services attorneys.
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