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A legal battle is brewing over new federal rules related to accounts that hold money to pay homeowners’ property taxes and insurance payments.
Ten state attorneys general filed a lawsuit on Tuesday seeking to invalidate a pair of Office of the Comptroller of the Currency rules that allow certain banking institutions under its supervision to sidestep state laws requiring them to pay interest on mortgage escrow balances. The federal lawsuit, filed in U.S. District Court in Oregon, names the OCC and Comptroller Jonathan Gould as defendants.
One new OCC 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. Banks are either chartered by a state or the federal government.
The OCC issued the new rules in May, and they became effective June 18.
“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 OCC did not respond to a request for comment.
How escrow accounts work
For many homeowners, in addition to principal and interest payments each month, their mortgage payment includes amounts that go into an escrow account. That account then pays out homeowners insurance premiums and property taxes, as well as mortgage insurance if the borrower is required to carry it.
About 80% of mortgage holders have an escrow account, according to Lereta, which provides real estate tax and flood data to mortgage servicers. Those without an escrow account pay insurance and taxes directly.
The federal 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 lawsuit reads.
For perspective, 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, according to the lawsuit. Exactly how much banks must pay in interest depends on the state.
For instance, in Rhode Island, escrow accounts must earn the same interest as a regular savings account, according to the suit. 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%, according to Bankrate. In comparison, the yield on a one-year Treasury is just shy of 4%.
The dollar amount of interest depends on how the state measures the average balance and the interest rate. For illustration only: A 0.63% annual rate paid on $5,000 would result in $31.50 in interest over the course of a year. At 4%, the same amount could earn $200 annually.
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 plaintiffs argue the OCC exceeded its authority in issuing the rules and rely on legal precedent that they say supports their position.
“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.
Some local banks may follow suit
State-chartered banks are not directly impacted by the new OCC rules, Maman said. However, some states have so-called 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,” 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, Maman said, so whether they change their practices may depend on where the bank is operating.
“Does that mean a national bank that has been doing it would immediately change it? They may or may not,” he said.
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