WASHINGTON — A move by a U.S. banking regulator to block state laws requiring national banks to pay interest on mortgage escrow accounts is an attempt to sidestep limits Congress and the Supreme Court placed on federal preemption after the financial crisis, according to consumer advocates and state regulators.
The Office of the Comptroller of the Currency in December issued two proposed rules aimed at stopping states from enforcing mortgage escrow requirements. As Bloomberg reported, one would give nationally chartered banks discretion to design escrow accounts as they see fit, including whether to pay interest. The other would effectively preempt laws in about a dozen states, including New York and California, that mandate interest payments.
If adopted, the proposals would violate congressional directives and Supreme Court rulings that bar the OCC from issuing blanket preemption orders, the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators said in a joint comment letter.
“The OCC cannot simply declare a power to ‘exercise discretion’ and then find a conflict with that power,” the groups wrote, calling the approach tantamount to unlawful field preemption.
Bloomberg noted the proposals followed a 2024 Supreme Court decision requiring courts to conduct a case-by-case analysis of whether state laws significantly interfere with national bank powers. Public comments on the OCC rules were due Jan. 29.
Long-Running Dispute
“Preemption has long been a flash point between the OCC, state regulators and consumer advocates,” Bloomberg reported in its analysis. “The National Bank Act of 1864 gave the OCC authority to determine when state laws do not apply to national banks, a power critics say was used to block enforcement of consumer protections ahead of the 2008 financial crisis.
Congress curtailed that authority in the 2010 Dodd-Frank Act, which codified a 1996 Supreme Court standard allowing preemption only when state laws ‘significantly interfere’ with bank operations.”
The report added that courts remain divided on how that standard applies to escrow interest laws. Federal appeals courts have allowed such requirements to apply to national banks in Rhode Island and California, while litigation over New York’s law continues.
The OCC said the proposals would provide clarity and could increase mortgage lending. Banks and trade groups backed the effort, Bloomberg said.
Shrinking Share of Market
The report said banks generated about $173 billion in mortgage loans in 2024, according to industry groups, but they account for a shrinking share of the market. Independent, state-chartered nonbank lenders originated 66% of U.S. mortgages securitized by Fannie Mae and Freddie Mac in 2022, according to a 2024 report from the Financial Stability Oversight Council.
United Wholesale Mortgage LLC, the largest U.S. nonbank lender, originated more than 366,000 home loans in 2024, according to a Bankrate analysis.
By comparison, Bank of America Corp. originated just over 83,000 loans, Bloomberg added.
