Ten state attorneys general filed a lawsuit Tuesday seeking to block a pair of federal rules that allow certain banks to stop paying interest on mortgage escrow accounts, regardless of state law. The suit, filed in U.S. District Court in Oregon, names the Office of the Comptroller of the Currency and Comptroller Jonathan Gould as defendants.
The OCC issued the two rules in May, and they became effective June 18. One rule codified the power of national banks and federal savings associations to determine the terms of escrow accounts, including whether to pay interest or charge fees. The other rule says federal law preempts state laws when it comes to OCC-regulated banks' flexibility in determining those aspects of escrow accounts.
About 80 percent of mortgage holders have an escrow account, according to Lereta, which provides real estate tax and flood data to mortgage servicers. For many homeowners, mortgage payments include amounts that go into an escrow account, which then pays out homeowners insurance premiums and property taxes.
The lawsuit notes that homeowners make monthly escrow payments, but property taxes and insurance premiums are generally paid annually or semiannually. This means escrow accounts can carry significant balances throughout the year. The average annual property tax bill for the 87 million owner-occupied homes in the U.S. was $4,271 in 2024, according to an analysis by the National Association of Homebuilders. The average annual cost of homeowners insurance is projected to reach $3,057 by the end of 2026, according to Insurify.com, an insurance-comparison site.
There are 14 states and U.S. territories that have laws requiring interest be paid on escrow balances. Exactly how much banks must pay in interest depends on the state. In Rhode Island, escrow accounts must earn the same interest as a regular savings account. In Maryland, lenders are required to pay annual interest at a rate based on the yield of one-year U.S. Treasuries.
The average rate on traditional savings accounts is 0.63 percent, according to Bankrate. The yield on a one-year Treasury is just shy of 4 percent. A 0.63 percent annual rate paid on $5,000 would result in $31.50 in interest over the course of a year. At 4 percent, the same amount could earn $200 annually.
The plaintiffs argue the OCC exceeded its authority in issuing the rules. The lawsuit reads that both Congress and the courts have repeatedly acted to preserve states' central role in protecting consumers, including enacting legislation to block attempts by national banks and their prudential regulator to circumvent or otherwise limit state laws aimed at protecting borrowers and other consumers.
State-chartered banks are not directly impacted by the new OCC rules, said Solomon Maman, an attorney in Chicago with expertise in financial services law. However, some states have wild card statutes within their banking laws that allow those banks to follow the federal lead. In those states, if a national bank is allowed to do something that state-chartered banks are not allowed to do, they get parity, Maman said.
Whether homeowners will suddenly stop earning interest on their escrow account is uncertain, Maman said. There are some conflicting court decisions in different federal courts, so whether banks change their practices may depend on where the bank is operating. The OCC did not respond to a request for comment.