OCC finalizes rule preempting state escrow interest

Key insight: The Office of the Comptroller of the Currency issued a preemption final rule Friday allowing national banks an exemption from state escrow interest requirements

Supporting data: The rule would apply to national banks doing business in the 14 states and territories that have their own laws concerning interest rates payable on escrow accounts, including New York and California.

Forward look: Banks could move to reduce the interest rates they pay on escrow accounts, but litigation over federal preemption is ongoing. 

The Office of the Comptroller of the Currency on Friday finalized a rule to preempt state laws that require banks to pay interest on mortgage escrow accounts. 

The OCC said the move is intended to provide "much-needed clarity" after conflicting court rulings over the extent to which federal banking powers override such laws, which are on the books in over a dozen states, including New York and California. The agency also finalized an accompanying rule, codifying their interpretation of the statute saying that banks may decide whether to pay interest on escrowed funds and whether to charge related fees. 

"In light of ongoing litigation, there remains substantial uncertainty for stakeholders who seek to rely on longstanding principles of Federal preemption in the context of State interest-on-escrow laws," the determination stated. "Moreover, this litigation has introduced ambiguity regarding how to evaluate National Bank Act preemption generally."

The OCC's final determination is part of a broader Trump administration push to expand federal preemption and reduce what regulators describe as costly state regulations. The Friday final rule wades into a legal fight over whether states can require national banks to pay interest on escrow accounts — lender-managed accounts used to store portions of mortgage payments diverted for property taxes and homeowners insurance. 

Preemption is grounded in the Supremacy Clause of the U.S. Constitution, which establishes that federal laws override conflicting state laws. The current issue stems from the Supreme Court's 2024 ruling in Cantero v. Bank of America, which reaffirmed the standard for federal banking preemption but stopped short of settling whether the National Bank Act overrides state escrow-interest laws. Since then, the Second Circuit sided with BofA in a challenge to New York's law, while the Ninth Circuit has repeatedly upheld California's statute against plaintiff Flagstar Bank, denying the bank's request for a rehearing in March. Banking advocacy groups argue these types of laws raise costs, while state regulatory groups have supported paying homeowners value on their escrowed funds. 

According to the OCC, the rule applies to laws in New York, California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont, Wisconsin, Guam, and the U.S. Virgin Islands. 

State banking advocacy groups opposed the rule, warning it weakens consumer protections and could eliminate value homeowners currently receive on escrow balances. 

Servicing

OCC proposing interest on escrow preemption moves

December 24, 2025 1:50 PM

By Bonnie Sinnock

Another consequence of the Cantero decision, however, is that agencies are given less deference from courts. Cantero limits the agency's ability to unilaterally declare that federal law overrides state banking regulations. Specifically, the Supreme Court rejected both the broad "control" and "interference" tests that lower courts had used and instead instructed them to apply a more historically grounded, case-by-case analysis — based on what's known as the Barnett standard. 

OCC's broad preemption rules could now face independent judicial review. The Conference of State Bank Supervisors President and CEO Brandon Milhorn responded by calling for the courts to invalidate the final determination, saying the rules are inconsistent with the law. 

"These OCC rules … brazenly ignore the process and standard for preempting state consumer financial laws, and courts should apply a rigorous independent evaluation[ and] are entitled to no deference," Milhorn said in a statement on Friday. "The OCC's attempt to lower the preemption standard benefits national banks at the expense of consumers. In contravention of Administrative Procedure Act requirements, the final rules also neglect to address the concerns raised by the majority of stakeholders who overwhelmingly opposed the proposal in numerous comment letters."