On December 23, the Office of the Comptroller of the Currency (OCC) released two Notices of Proposed Rulemaking (NPRM) relating to escrow accounts on consumer mortgage accounts. This comes directly on the heels of Comptroller Jonathan Gould’s statement regarding the 10th Circuit Court of Appeals’ ruling on preemption in National Association of Independent Bankers v. Weiser, which Asurity Advisors analyzed here.
The first NPRM seeks to “codify longstanding powers of national banks and federal savings associations to establish or maintain real estate lending escrow accounts and to exercise flexibility in making business judgment as to the terms and conditions of such accounts, including whether and to what extent to offer any compensation paid to customers or to assess any related fees.”[1] The second NPRM is narrower and seeks to preempt state laws requiring banks to pay interest earned on escrow accounts to borrowers or prohibiting banks from assessing fees in connection with escrow accounts.
Background
Escrow accounts, which are accounts established by mortgage servicers to hold borrower funds which will be disbursed for payments to taxing authorities, insurance companies, and other interested parties, are highly prevalent in the mortgage industry. These accounts are regulated at the federal level by the Real Estate Settlement Procedures Act (RESPA). RESPA does not presently regulate how institutions collect, pay, or distribute any interest earned on funds held in escrow accounts. Additionally, while RESPA has strict regulations governing the calculation of escrow amounts and cushions that institutions can require customers to contribute, it does not speak to standalone fees institutions may or may not charge for operating the account. That said, the secondary market (in particular, Fannie Mae and Freddie Mac) often require that, for any payments made by borrowers for owned real estate that could result in a lien against the property, such payments be escrowed. With many institutions participating in the secondary market, this requirement serves as a bona fide “regulation” of sorts.
New York introduced and passed an “interest-on-escrow” law which would require any bank or mortgage servicer to collect and pay a minimum two percent interest rate on balances held in escrow accounts to borrowers. Additionally, the law would largely prohibit institutions from assessing fees for servicing those accounts.
NPRMs
These two NPRMs work together in tandem with the overarching goal of preempting New York’s interest-on-escrow law and other similar laws. (In the NPRM, the OCC also notes that it has analyzed 11 similar state laws that it views would also be preempted.)
The first NPRM sets the groundwork by amending the OCC’s real estate lending and appraisal regulation. Currently, the regulation generally permits national banks to “make, arrange, purchase, or sell loans or extensions of credit, or interests therein, that are secured by liens on, or interests in, real estate”[2] and additionally contains certain important definitions, preemptions, and other necessary legal terms. The NPRM seeks to amend the regulation by first codifying the definition of an escrow account and, second and most importantly, including the following authority in the same part as national banks’ real estate lending authority:
“National banks may establish or maintain escrow accounts. The terms and conditions of any such escrow account, including the investment of escrowed funds, fees assessed for the provision of such accounts, or whether and to what extent interest or other compensation is calculated and paid to customers whose funds are placed in the escrow account, are business decisions to be made by each national bank in its discretion.”
Should the first NPRM be codified as it is currently written, it would pave the way for the second NPRM which would use this language (along with the OCC’s preemption determination powers granted through Dodd-Frank) to preempt New York’s interest-on-escrow law (and other similar state laws). Specifically, the OCC writes:
“The OCC is concurrently proposing a regulation to codify national bank’s authority to establish and maintain escrow accounts and to clarify that the terms and conditions of any such escrow account, including the investment of escrowed funds, fees assessed for the use of such accounts, or whether and to what extent interest or other compensation is calculated and paid to customers whose funds are placed in the escrow account, are business decisions to be made by each national bank in its discretion. As noted in the proposed rule, that regulation would codify authority that national banks already have under federal law. Even in the absence of that rule, national banks have the flexibility to make informed business decisions about how to effectively and efficiently set the terms and conditions of their escrow accounts.”
The OCC’s proposed preemption would nullify (for national banks) certain escrow-related laws in the following states:
- California
- Connecticut
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Utah
- Vermont
- Wisconsin
- “The laws of any other state with substantively equivalent terms.”
Analysis
Expanding the scope of federal preemption has been a major focus for the OCC in recent weeks. Interestingly, however, while the Colorado DIDMCA preemption question may have the effect of making national banks more attractive than state-chartered banks, the OCC’s attempt to preempt state laws governing interest-on-escrow and fees may have the opposite effect. For example, if a national bank need not comply with New York’s law and will keep any interest earned on an escrow account as profit plus charge a fee for servicing such account, a state-chartered bank in New York bound by the applicable law would be required to pay borrowers for interest earned (i.e., money in the hands of the borrower).
The OCC has been focused on core financial risks throughout 2025 and, in turn, has promoted innovative changes to expand the national banking system. A law such as New York’s interest-on-escrow law would potentially limit revenue and profitability in the competitive mortgage market and, without preemption, would be applicable to national banks.
Conclusion
Banks of all charter types should continue to monitor these NPRMs and the OCC’s public statements regarding preemption, and adjust their business plans accordingly. Preemption has been a topic of discussion in 2025 and may continue to see further discourse in the near future.
[1] OCC News Release 2025-133.
[2] See 12 CFR 34.3(a).
About the author
Ryan Labriola is a Senior Manager with Asurity Advisors. Ryan has expertise in military lending laws and regulations, including the Servicemembers Civil Relief Act and the Military Lending Act. He has advised financial institutions and non-bank lenders on SCRA and MLA compliance, and has participated in significant lookback and remediation engagements relating to servicemembers’ benefits and protections under federal and state law.