Your mortgage payment can do more than pay down your loan. For many homeowners, it also includes money for future property-tax and homeowners-insurance bills. That money goes into an escrow account managed by the lender or loan servicer until those bills are due.
Because borrowers typically contribute to escrow every month, but taxes and insurance are usually paid only once or twice a year, the account can hold a meaningful balance for months. The question is: while that money sits there, who gets the interest?
That question is now at the center of a lawsuit by 10 states against the Office of the Comptroller of the Currency. The states say the agency’s new rules could let national banks stop paying interest on mortgage escrow accounts, even where state law requires it.
Escrow 101
Escrow accounts help homeowners spread large property-tax and insurance bills across the year. They also protect lenders: unpaid taxes can create a lien with priority over the mortgage, while lapsed insurance can leave the home’s value exposed to damage. The OCC says about 80% of residential purchase mortgages use escrow accounts.
Not every mortgage lender or servicer is a national bank. But national banks and federal savings associations are federally chartered institutions regulated by the OCC, making them the focus of the agency’s new rules.
That distinction matters because several states require lenders to pay interest on escrowed funds. The states say those laws prevent banks from benefiting from what can amount to an interest-free loan from mortgage customers.
OCC’s New Rules
That issue came to a head in May 2026, when the OCC issued two related final rules affecting national banks and federal savings associations.
The Escrow Powers Rule says banks have the authority to establish and manage mortgage escrow accounts and may set their terms and conditions — including whether, and how much, interest or other compensation to pay customers. The agency said that flexibility can help banks balance the costs of administering escrow accounts and may avoid higher mortgage fees.
A separate preemption determination concluded that New York’s escrow-interest law and 13 laws the OCC deemed substantively equivalent are preempted as applied to national banks and federal savings associations. In other words, the OCC says those federally chartered institutions need not comply with those state interest-on-escrow requirements.
The affected jurisdictions are California, Connecticut, Guam, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, the U.S. Virgin Islands, Utah, Vermont, and Wisconsin.
On Aug. 11, 2026, 10 states (Oregon, New York, California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Rhode Island, and Vermont) sued in the U.S. District Court for the District of Oregon
States Say the Rules Go Too Far
In the joint lawsuit, the plaintiff states named the OCC and Comptroller Jonathan V. Gould as defendants and asked the court to set aside both the Escrow Powers Rule and the preemption determination.
The states say the rules violate the Administrative Procedure Act. Their central argument is that the OCC created a broad new bank power over escrow-account terms primarily to displace state consumer-protection laws, then used that asserted power as the basis for preempting state requirements.
To make that argument, the states rely on the Supreme Court’s Barnett Bank standard. Under that standard, a state law is preempted only if it “prevent[s] or significantly interfere[s] with” a national bank’s federal powers. The states argue that an escrow-interest requirement does not meet that threshold simply because it limits a bank’s preferred business practices.
The complaint also alleges that the OCC failed to provide the substantial evidence Dodd-Frank requires for a preemption finding. It says the agency treated laws with different interest rates, covered mortgages, and fee restrictions as interchangeable. The states want the court to declare both rules unlawful and vacate them.
A Fight Over Consumer Protection
The disagreement is not only about interest on escrow balances. It is also a dispute over how much authority states retain to regulate nationally chartered banks.
Dodd-Frank limits federal preemption of state consumer-financial laws. It requires the OCC to make preemption findings on a case-by-case basis and support them with substantial evidence. The states argue that Congress specifically rejected the idea that federal banking law occupies the entire field of state banking regulation.
The Supreme Court addressed a closely related question in its 2024 decision in Cantero v. Bank of America. The Court rejected a categorical approach that would preempt virtually all state laws regulating national banks and instructed courts to make a practical, fact-specific assessment of a state law’s interference with bank powers.
That guidance has not completely resolved the issue. The courts remain divided: The Ninth Circuit has held that California’s escrow-interest law is not preempted, while the Second Circuit, on remand in Cantero, reached the opposite conclusion regarding New York’s law.
What It Could Mean for Homeowners
For homeowners in the affected states whose mortgages are held or serviced by a national bank or federal savings association, the case could determine whether those institutions must continue crediting interest on mortgage escrow funds.
The state requirements vary: California requires at least 2% interest while Oregon requires a rate at least equal to its discount rate (currently 2.61%). New York either requires 2% or a higher rate set by the state financial-services superintendent. Connecticut and Rhode Island tie their rates to deposit-account rates, while Massachusetts lets lenders determine the rate and method of payment.
The OCC says greater discretion may lower account-management costs, fees, and pressure on mortgage lending. The states say the agency relied on speculation rather than evidence and would eliminate long-standing protections against banks benefiting from borrowers’ idle escrow funds.
The case is only beginning, but it could determine who gets the benefit of the money sitting in mortgage escrow accounts: homeowners, banks, or both. Just as importantly, the outcome could define how far the OCC can go in overriding state consumer-protection laws governing nationally chartered banks.
