A coalition of state attorneys general initiated legal action this week to overturn recent regulatory guidance issued by the Office of the Comptroller of the Currency. The contested rules, which took effect in June, permit national banks and federal savings associations regulated by the OCC to establish their own terms for mortgage escrow accounts, including decisions about interest payments and fees.
Escrow accounts are used to hold funds for property taxes, homeowners insurance, and sometimes mortgage insurance. Approximately 80% of mortgage holders maintain such accounts, which accumulate significant balances throughout the year since property taxes and insurance premiums are typically paid annually or semiannually, while homeowners make monthly escrow contributions. Based on recent data, average annual property tax bills exceed $4,000 while homeowners insurance costs are projected to reach approximately $3,000 annually.
Fourteen states and U.S. territories currently have laws requiring that interest be paid on escrow balances, with rates varying by jurisdiction. Some states mandate interest matching regular savings account rates, while others tie interest payments to Treasury yields. Current savings account rates average around 0.63%, whereas one-year Treasury yields are approximately 4%, meaning the financial difference to homeowners could be substantial depending on account balances and applicable interest rates.
The lawsuit, filed in federal court in Oregon, contends that the OCC overstepped its authority and violated principles of federalism designed to preserve state protections for consumers. Legal experts note that uncertainty remains regarding how banks will respond to the new rules, as conflicting court precedents exist in different jurisdictions. Additionally, some states contain provisions allowing state-chartered banks to follow federal standards when national banks gain competitive advantages, potentially expanding the impact beyond federally-regulated institutions.
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