A legal challenge has emerged regarding federal regulations governing mortgage escrow accounts, which hold funds for homeowners’ property taxes, insurance, and mortgage insurance payments. Ten state attorneys general filed suit in U.S. District Court in Oregon on Tuesday to overturn two rules issued by the Office of the Comptroller of the Currency. The rules, which took effect June 18, allow national banks and federal savings associations supervised by the OCC to determine whether to pay interest on escrow balances and charge fees, while asserting that federal law preempts state requirements on the matter.
Approximately 80% of mortgage holders maintain escrow accounts, according to industry data. Since property taxes and insurance are typically paid annually or semiannually while homeowners make monthly escrow payments, these accounts can accumulate substantial balances throughout the year. The average annual property tax bill exceeds $4,000, and homeowners insurance costs are projected to average around $3,000 annually.
Fourteen states and U.S. territories currently have laws mandating interest payments on escrow balances, with rates varying by jurisdiction. Rhode Island requires escrow accounts to earn the same interest as regular savings accounts, while Maryland bases rates on one-year Treasury yields. Current savings account rates average 0.63%, compared to nearly 4% for one-year Treasuries, resulting in substantial annual differences on typical account balances.
The states argue the OCC overstepped its authority and cite legal precedent holding that Congress and courts have consistently protected state roles in consumer protection. State-chartered banks are not directly affected by the OCC rules, though some states’ banking laws may allow them to follow the federal lead. Legal experts note uncertainty about whether banks will immediately change their practices, as conflicting court decisions across federal districts may influence compliance depending on where institutions operate.
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