10 States Sue to Block Federal Mortgage Escrow Interest Rules

A coalition of 10 states is challenging new federal rules they say unlawfully strip them of the authority to require national banks to pay a certain amount of interest on homeowners’ mortgage escrow accounts.

The lawsuit, filed Tuesday in federal court in Portland, Oregon, challenges a pair of rules issued in May by the Office of the Comptroller of the Currency (OCC), a bureau of the Treasury Department that regulates national banks and federal savings associations.

The dispute centers on mortgage escrow accounts, which allow lenders to collect money from borrowers, typically as part of their monthly mortgage payments, to cover expenses such as property taxes and homeowners insurance when those bills come due.

Several states, including Oregon, have laws requiring lenders to pay borrowers interest on money held in those accounts.

The OCC’s first rule, however, gives banks discretion over the terms of their mortgage escrow accounts, including whether to pay customers interest or other compensation. A second rule says federal law preempts state laws restricting that discretion.

Oregon Attorney General Dan Rayfield, who is leading the lawsuit with New York Attorney General Letitia James, said the rules would allow national banks to keep money that otherwise would go to homeowners.

“This is a case in point: the Administration wants to let big banks pad their profits with money that, by law, belongs to Oregon families,” Rayfield said in announcing the lawsuit.

He also argued that the OCC’s action would put smaller state-chartered banks at a competitive disadvantage, since they would remain subject to Oregon’s interest-on-escrow requirements while national banks would not.

The lawsuit is joined by attorneys general of California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Rhode Island, and Vermont.

The Epoch Times has reached out to the OCC for comment.

State Escrow Laws

Interest-on-escrow laws vary from state to state.

Some states set a minimum interest rate that lenders must pay borrowers. California, for example, requires at least 2 percent annual interest on qualifying escrow accounts, while Minnesota generally requires 3 percent.

Other states tie the amount to changing market rates. Maryland, for example, requires certain lenders to pay interest at an annual rate no lower than the weekly average yield on one-year U.S. Treasury securities, measured at the beginning of the calendar year.

Connecticut, meanwhile, uses a deposit index based on national savings and money-market deposit rates. The state’s required mortgage escrow interest rate for 2026 is 0.5 percent.

The OCC argues that imposing different requirements from state to state interferes with the federally granted powers of national banks.

In announcing the rules in May, the agency described federal preemption as important to “reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth.”

The OCC said its preemption determination applies to New York’s interest-on-escrow law as well as substantively similar laws in 13 other states and U.S. territories.

A Circuit Split

The rules come amid a broader legal battle over how much power states have to regulate national banks.

The OCC cited a May 5 decision by the U.S. Court of Appeals for the Second Circuit, which ruled 2–1 that federal law preempts New York’s requirement that banks pay at least 2 percent interest on mortgage escrow accounts when applied to national banks.

The court concluded that the New York law interferes with national banks’ federally granted power to set the terms of mortgage escrow accounts and could make offering those accounts less efficient.

But other federal appeals courts have reached the opposite conclusion, creating a split over the issue.

The First Circuit ruled in 2025 that a similar Rhode Island law was not preempted, while the Ninth Circuit allowed California’s interest-on-escrow requirement to continue applying to national banks.

The U.S. Supreme Court previously weighed in on the dispute in 2024, when it unanimously vacated an earlier Second Circuit ruling in the New York case, Cantero v. Bank of America.

The justices said the appeals court had used the wrong legal analysis and instructed it to determine whether the state law “prevents or significantly interferes” with a national bank’s exercise of its powers.

After reconsidering the case, the Second Circuit again sided with Bank of America in May.

The homeowners have now asked the Supreme Court to review the case for a second time. Their petition was filed May 22, and Bank of America filed its opposition on Aug. 10.

The Supreme Court had yet to announce whether it would hear the case at the time of publication.