Multi-State Coalition Sues OCC Over Rules Preempting State Interest-On-Escrow Laws

A group of ten state attorneys general sued the OCC over recent rulemakings which affirmed that national banks are exempt from state laws requiring payment of interest on mortgage escrow accounts.

In May 2026, the OCC issued the two final rules which are the subject of the suit (as previously discussed here).  The first rule clarified that the powers of national banks include the ability to establish mortgage escrow accounts.  The rule further stated that banks have flexibility in developing the terms and conditions of their escrow accounts, including whether to offer any compensation for funds held in them.  The second rule determined that federal law preempts state laws which restrict national banks’ flexibility in managing their escrow accounts, including state laws which require payment of interest on funds held in these accounts.

The group of States—Oregon, New York, California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Rhode Island, and Vermont—filed suit in the U.S. District Court for the District of Oregon against the OCC.  The complaint notes a number of points, including that:

• The rules failed to take into account the need to protect consumers from alleged abuses;
• Notwithstanding their federal charters, national banks remain subject to many types of state laws related to banking;
• Due to alleged overstepping by the OCC in the past, the Dodd-Frank Act narrowed the areas where a state banking law would be deemed preempted; added strict procedural requirements the OCC needed to follow before deeming a state law preempted; and limited deference owed to OCC preemption determinations;
• Courts had rejected past attempts by lenders and the OCC to assert that state laws regarding escrow accounts were preempted; and
• The OCC was solely seeking to manufacture a conflict between federal law and state interest-on-escrow laws so that the OCC could assert preemption.

The complaint asserts that the OCC overstepped its authority in issuing the rules and failed to develop substantial evidence showing they were warranted.  Further, the OCC allegedly failed to follow statutory requirements and Supreme Court precedent limiting preemption to situations where a state banking law prevents or significantly interferes with a national bank’s exercise of its banking powers.  The States request that the rules be vacated under the Administrative Procedure Act (APA) for being in excess of the OCC’s statutory authority, contrary to law, and arbitrary and capricious.