Lawsuit challenges new bank rules

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.

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…