NEW YORK — The attorneys general of New York, Connecticut and eight other states have sued the Trump administration in an effort to block new federal rules that would prevent states from requiring national banks and federal savings associations to pay interest on homeowners’ mortgage escrow accounts.
New York Attorney General Letitia James and Connecticut Attorney General William Tong said the lawsuit challenges two rules issued by the Office of the Comptroller of the Currency that preempt state laws requiring banks to pay interest on money held in escrow for property taxes and homeowners insurance.
The lawsuit, filed in U.S. District Court for the District of Oregon in Portland, seeks a court order declaring the OCC rules unlawful and blocking their implementation. It names the OCC and Comptroller of the Currency Jonathan V. Gould, in his official capacity, as defendants.
“At a time when homeownership is more expensive than ever, the Trump administration is trying to make it even more costly with these unlawful rules,” James said. “Big banks and mortgage lenders should not be able to force homeowners to lock away significant amounts of money without paying interest. For decades, New York has prevented lenders from taking advantage of homeowners, and my office is taking action to defend our laws.”
Tong said the OCC’s action would benefit large banks at the expense of homeowners.
‘Out of Reach’
“Homeownership is out of reach for too many families already and the last thing they need is another rule that helps big banks profit off their hard-earned money,” Tong said. “This new rule will put banks first, families last, and strip states of yet another tool put in place to help consumers.”
According to James’ office, mortgage lenders began requiring borrowers in the 1930s to make monthly payments into escrow accounts to cover property taxes and homeowners insurance premiums. The payments effectively provided lenders with interest-free funds, and lenders sometimes required borrowers to deposit significantly more than necessary.
States began adopting laws in the 1970s requiring lenders to pay interest on escrow funds in response to those practices, James’ office said.
The OCC has argued that state escrow-interest requirements interfere with national banks’ flexibility to establish the terms of escrow accounts and therefore can be preempted.
The Allegations
The states contend the OCC rules are unlawful on several grounds, including:
- Dodd-Frank Act: The lawsuit argues the rules violate limits imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act on the OCC’s authority to preempt state consumer-protection laws. The states contend escrow-interest requirements have only a minimal effect on national bank operations.
- Administrative Procedure Act: The attorneys general argue the OCC exceeded its authority by effectively granting additional powers to national banks.
- Lack of factual support: The lawsuit alleges the OCC based its rules on unsupported speculation and failed to adequately consider potential harm to consumers and the financial system, making the rules arbitrary and capricious.
Tong also said the OCC rules could put Connecticut’s smaller, state-chartered banks at a competitive disadvantage. National banks would no longer have to comply with Connecticut’s interest-on-escrow requirement, while state-chartered institutions would remain subject to the law.
Joining James and Tong in the lawsuit are the attorneys general of California, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island and Vermont.
