States, Consumers Blast OCC Push to Preempt Mortgage Escrow Laws

A US banking regulator’s move to block state laws forcing national banks to pay interest on mortgage escrow accounts is an end run around post-financial crisis limits on federal preemption powers, state regulators and consumer advocates said.

The Office of the Comptroller of the Currency in December issued a pair of proposals that aimed to stop states from enforcing mortgage escrow account requirements.

One proposal would grant federally chartered banks the flexibility to design mortgage escrow accounts as they see fit, including determining whether or not they will pay interest. The second would effectively preempt laws in around a dozen states including New York and California mandating interest payments on those accounts.

The OCC’s maneuver, should it take effect, would violate directives from Congress and the US Supreme Court rejecting the agency’s ability to issue blanket preemption orders barring state laws’ application to national banks, the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators said in a joint comment letter.

“The OCC cannot simply declare a power to ‘exercise discretion’ and then find a conflict with that power,” the letter said. “Such a vaguely defined and broad power is tantamount to field preemption.”

The OCC’s proposals followed a 2024 US Supreme Court decision requiring courts to conduct a more nuanced analysis to determine whether state laws disrupt national bank activities and should be preempted.

Comments were due Jan. 29.

Simmering Conflict

The OCC’s preemption power has long been a flash point between the national bank regulator, state regulators, and consumer advocates.

The 1864 National Bank Act, which created the OCC and its national bank charter, allowed the agency to determine that state laws don’t apply to national banks.

Consumer advocates and independent researchers say the OCC’s use of preemption powers blocked states from enforcing consumer protection laws against national banks that could’ve at least mitigated abusive lending practices contributing to the 2008 financial crisis.

Congress moved to limit that power in the 2010 Dodd-Frank Act by codifying the Supreme Court’s 1996 Barnett Bank of Marion County N.A. v. Nelson decision, which stated that the OCC could preempt a state consumer protection law only if it “significantly interferes” with a national bank’s operations.

The Supreme Court in its Cantero v. Bank of America decision held that courts need to review individual state laws’ impact on bank operations to determine whether a law is preempted.

The Cantero decision overturned a US Court of Appeals for the Second Circuit ruling that New York’s 2% interest requirement on mortgage escrow accounts didn’t apply to national banks.

The Second Circuit is still reviewing that case. In the meantime, panels on the First and Ninth circuits have released their own opinions allowing mortgage escrow interest requirements in Rhode Island and California, respectively, to apply to national banks.

The OCC said its proposals were necessary to provide clarity and potentially increase mortgage lending.

Banks supported the proposals.

“By clarifying the application of settled preemption principles, the OCC’s proposals will reduce unnecessary litigation and preserve national banks’ ability to manage risk and price mortgage products effectively,” the Bank Policy Institute and the Consumer Bankers Association said in a joint letter. “This clarity benefits consumers by preventing state interest-on-escrow laws from reducing mortgage approval rates.”

Nonbanks’ Growing Share

The banking industry trade groups said their members generated $173 billion in mortgage loans in 2024.

But banks issue only a fraction of US mortgages.

Independent nonbank mortgage lenders issued 66% of all US mortgages securitized by Fannie Mae and Freddie Mac in 2022, according to a 2024 report from the Financial Stability Oversight Council.

Industry watchers say the share of mortgages originated by nonbank mortgage lenders has only increased since then.

The largest US nonbank mortgage lender, United Wholesale Mortgage LLC, originated more than 366,000 home loans in 2024, according to a Bankrate LLC analysis of federal lending data. By contrast, Bank of America Corp., the largest mortgage lender among traditional banks, issued just over 83,000 home loans that year, Bankrate found.

Nonbank mortgage companies are state-chartered.

“Many mortgages are made by nonbank entities, which are able to operate while complying with state laws requiring interest on escrow accounts, rebutting the claim that these laws significantly interfere with the power to make mortgages,” the National Consumer Law Center said in its letter.

Pre-Crisis Stance

The OCC’s move to block state mortgage escrow interest requirements on national banks could be a model the agency uses to preempt other state laws.

The American Bankers Association and the US Chamber of Commerce said the OCC should “make use of this preemption authority anytime that doing so would help provide clarity regarding national banks’ freedom to exercise their federally authorized powers free from the constraints of state law, even when not accompanied by corresponding regulation codifying the authority in question.”

But the OCC’s new standard—preempting laws to give banks more “flexibility” to craft their own products and services—is unlawful, New York Attorney General Letitia James (D) and a bipartisan group of more than 20 other state attorneys general and banking regulators said.

“Congress’s command that the OCC may find a state law preempted only where such a law ‘significantly interferes’ with national bank operations is replaced by the OCC’s ability to adopt preemptive rules to protect national bank flexibility or business judgments, effectively reverting to the OCC’s prior 2004 preemption rules—a standard Congress expressly rejected,” the state attorneys general and regulators said.