Ten states sue Trump banking regulator over mortgage escrow interest - billions at stake
Ten states are challenging new federal rules that let national banks ignore state laws requiring interest on consumers’ mortgage escrow money.
- Ten states are challenging new federal rules that let national banks ignore state laws requiring interest on consumers’ mortgage escrow money.
- The dispute could determine whether states retain meaningful power to impose consumer protections on federally chartered banks.
- The stakes extend well beyond escrow accounts: a victory for the OCC could make it easier for the federal banking regulator to override other state financial-protection laws.
Ten states have sued the Office of the Comptroller of the Currency, challenging rules that could allow federally chartered banks to stop paying interest on billions of dollars consumers keep in mortgage escrow accounts.
The lawsuit, filed Aug. 11 in federal court in Oregon, was brought by Oregon, New York, California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Rhode Island and Vermont. It challenges two rules issued by the OCC in May that declare state mortgage-escrow interest requirements preempted by federal banking law, Consumer Finance Monitor reported.
For homeowners, the issue is fairly simple even if the law behind it is not.
James R. Hood
Mortgage servicers commonly collect part of a homeowner's property-tax and insurance bills each month and hold the money in an escrow account until the bills come due. Depending on the size of the mortgage and local taxes and insurance costs, thousands of dollars belonging to a homeowner may sit in the account for months.
A number of states require lenders to pay consumers interest on that money.
The OCC says national banks don't have to.
What the OCC did
On May 15, the OCC adopted two companion rules that took effect June 18.
One formally declares that national banks have the power to establish escrow accounts and decide their terms, including "whether and to what extent" consumers receive interest or other compensation.
The second declares that federal law preempts New York's escrow-interest law and 13 other state and territorial laws the OCC considers substantially equivalent. (OCC.gov)
The affected laws include those of California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont and Wisconsin, along with Guam and the U.S. Virgin Islands. New York's law was the one the OCC analyzed directly.
The requirements aren't all alike.
California generally requires lenders to pay at least 2% interest on qualifying escrow accounts. New York also generally requires 2%, while Oregon uses a rate tied to Treasury securities. Connecticut and Rhode Island base their requirements on savings-account rates, and other states use still different formulas.
Nevertheless, the OCC concluded the laws interfere with federally chartered banks' ability to determine the terms of their escrow accounts.
States say OCC manufactured a conflict
The states argue that the OCC essentially created its own justification for eliminating their laws.
Their complaint describes what it calls a "twin-regulation" strategy: First, the OCC issued a rule giving national banks broad discretion over escrow terms. Then it ruled that state laws interfere with that newly declared federal discretion.
The states contend Congress never authorized the agency to create federal banking powers simply to manufacture conflicts with state consumer laws.
They also argue the OCC applied the wrong legal test.
Under the Dodd-Frank Act, a state consumer-finance law generally may be displaced only if it "prevents or significantly interferes" with a national bank's exercise of its federal powers.
The states say the OCC substituted a much looser standard — whether a law limits a bank's "flexibility" or business judgment.
That distinction could affect far more than escrow interest.
Supreme Court has already warned against blanket preemption
The lawsuit relies heavily on the Supreme Court's 2024 decision in Cantero v. Bank of America, which involved New York's escrow-interest requirement.
The Supreme Court rejected an approach under which state laws could be swept aside simply because they affected a federally authorized banking activity. Instead, courts must make a practical assessment of how seriously a particular state law interferes with national-bank powers.
The states say the OCC's new rules effectively revive the categorical approach the Supreme Court rejected.
There's already disagreement among federal appeals courts.
The Ninth Circuit has upheld California's escrow-interest law against a National Bank Act challenge, and in 2025 reaffirmed that conclusion after the Supreme Court's Cantero ruling. The First Circuit has similarly upheld Rhode Island's law. The Second Circuit, however, has held that New York's law is preempted.
That split makes another Supreme Court intervention increasingly possible.
How much money is involved?
For an individual homeowner, escrow interest usually isn't a windfall. But it is the homeowner's money.
Suppose a borrower carries an average escrow balance of $6,000 during the year. A 2% requirement would produce about $120 annually.
At $10,000, the interest would be about $200.
Multiply those amounts by hundreds of thousands of mortgages and the dispute becomes economically significant.
Without an interest requirement, banks can hold consumers' escrow funds without paying them anything for the use of the money.
The OCC argues that federal law gives national banks flexibility to decide whether and how much interest to pay and says state mandates interfere with that authority.
Why this case matters beyond mortgages
The broader fight concerns how much authority states still have over national banks.
Congress tightened the rules governing federal preemption when it passed Dodd-Frank after the 2008 financial crisis. Among other things, the law rejected the idea that federal banking regulation automatically occupies the entire field, required individualized consideration of state laws and required substantial evidence to support certain OCC preemption findings.
The states contend the OCC did not produce evidence showing that escrow-interest laws caused banks meaningful losses, restricted mortgage lending or otherwise significantly interfered with banking operations.
If the OCC's approach survives, states fear the same method could be used elsewhere: define a broad federal banking power, give banks discretion over how they exercise it, and then declare state restrictions on that discretion preempted.
That could potentially weaken state authority over other areas of consumer finance. For now, however, the immediate question is much narrower:
When a bank holds a homeowner's money for months at a time, can a state require the bank to pay the homeowner interest on it?
Ten states say yes. The OCC says federal banking law says otherwise.
A federal judge — and quite possibly the Supreme Court — may ultimately decide.
