State banking and mortgage regulators are urging the Office of the Comptroller of the Currency (OCC) to withdraw proposed rules they say would improperly override state consumer protection laws and shift costs onto homeowners.
In a joint comment letter, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) argued that the OCC’s proposal to preempt state interest-on-escrow laws exceeds the agency’s statutory authority, disregards established legal precedent, and would primarily benefit national banks at the expense of consumers.
Under the proposal, national banks would be exempt from paying interest on mortgage escrow accounts used to collect funds for property taxes and insurance.
Currently, 12 states require lenders or servicers to pay interest on these balances to discourage excessive escrow collections that can function as interest-free funding for financial institutions. Those states — California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin — account for roughly 30% of U.S. mortgages.
CSBS President and CEO Brandon Milhorn said the proposal would undermine decades of state-level consumer protections. He also criticized the OCC for attempting to sidestep congressional intent and court rulings, calling the proposal both legally flawed and harmful to housing affordability.
“No matter how hard they try, the OCC cannot regulate around Congress and the courts,” said Milhorn. “The OCC’s interest-on-escrow regulatory proposals would erode 50 years of state law designed to protect consumers. These OCC proposals are not only bad law — falling well below the Cantero preemption standard — but they are also horrible policy. Taking money out of the pockets of homeowners and giving it to national banks is a callous response to the housing affordability crisis.”
The coalition of regulators warned that the rule would distort competition by placing state-chartered banks and nonbank mortgage servicers — which would still be required to comply with state interest-on-escrow laws — at a disadvantage. Because consumers generally do not control who services their mortgage, the groups said homeowners could lose hundreds or even thousands of dollars solely based on whether their loan is serviced by a national bank.
Beyond the financial impact, CSBS and AARMR argued that the proposal fails to meet the legal standard for federal preemption of state consumer protection laws. They said the OCC is attempting to replace the long-standing “prevents or significantly interferes” test under the National Bank Act with a weaker “unnecessary burden” standard that lacks statutory support and has been rejected by multiple courts, including in the Supreme Court’s Cantero decision.
