10 States Sue to Block OCC Rules Ending Escrow Interest

Ten state attorneys general sued Tuesday to block new OCC rules letting national banks stop paying interest on mortgage escrow accounts, a change affecting roughly 80 percent of U.S. mortgage holders.

"The rules basically allow OCC-regulated banks not to pay interest on mortgage escrow accounts," said Solomon Maman, an attorney in Chicago with expertise in financial services law.

The lawsuit, filed in U.S. District Court in Oregon, names the OCC and Comptroller Jonathan Gould as defendants. One rule codified the power of national banks and federal savings associations to determine escrow account terms, including whether to pay interest or charge fees. The other declares federal law preempts state laws on those terms. The OCC issued both rules in May; they took effect June 18. Fourteen states and U.S. territories have laws requiring interest on escrow balances, with rates varying by jurisdiction. Rhode Island mandates escrow accounts earn the same rate as a regular savings account, while Maryland requires annual interest tied to the one-year U.S. Treasury yield.

The stakes are measurable for homeowners. On a $5,000 escrow balance, a 0.63 percent savings-account rate yields $31.50 annually; at the roughly 4 percent one-year Treasury yield, the same balance earns about $200. The outcome hinges on the lawsuit and conflicting federal court decisions on OCC preemption authority.

Fourteen States Require Interest on Escrow Balances

For many homeowners, monthly mortgage payments include amounts deposited into an escrow account in addition to principal and interest. That account then pays out homeowners insurance premiums, property taxes, and mortgage insurance when required. About 80 percent of mortgage holders have an escrow account, according to Lereta, which provides real estate tax and flood data to mortgage servicers. Those without escrow accounts pay insurance and taxes directly.

The lawsuit notes homeowners make monthly escrow payments, but property taxes and insurance premiums are generally paid annually or semiannually, meaning 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.

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, while the yield on a one-year Treasury is just shy of 4 percent.

Wild Card Statutes Could Widen the Rules' Reach

The plaintiffs argue the OCC exceeded its authority in issuing the rules, citing legal precedent. "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, the OCC, to circumvent or otherwise limit state laws aimed at protecting borrowers and other consumers," the lawsuit reads.

State-chartered banks are not directly impacted by the new OCC rules, Maman said. 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 aren't allowed to do, they get parity," he said.

Whether homeowners will suddenly stop earning interest on their escrow accounts is uncertain, Maman said. "There are some conflicting court decisions" in different federal courts, he said, so whether banks change their practices may depend on where they operate. "Does that mean a national bank that has been doing it would immediately change it? They may or may not," he said.

Depending on the state and the lender, interest earned is credited to the account or paid out. In some cases, the homeowner may also receive a tax form — a 1099-INT — showing the amount of earned interest, which is taxable.

The OCC did not respond to a request for comment.

This article is for informational purposes only and does not constitute investment advice.