On May 15, the Office of the Comptroller of the Currency (OCC) finalized two closely linked rules on mortgage escrow accounts that respond directly to the issues we discussed in our recent post, Second Circuit on Remand in Cantero: New York Escrow-Interest Law Is Preempted, Over a Vigorous Dissent. In that decision, the Second Circuit held that New York’s 2% interest‑on‑escrow statute is preempted as applied to national banks under the Barnett Bank standard, deepening a circuit split with the First and Ninth Circuits. The OCC’s new rules both adopt the Second Circuit’s view of the underlying bank powers and attempt to bring regulatory clarity to the interest‑on‑escrow preemption question for OCC‑regulated institutions nationwide.

The first rule, Real Estate Lending Escrow Accounts, amends OCC regulations for national banks and federal savings associations to codify what the agency characterizes as longstanding, recognized powers: the authority to establish and maintain real estate lending escrow accounts and to exercise business judgment over the “terms and conditions” of those accounts, including whether and to what extent to pay interest or other compensation on escrow balances and whether to charge related fees. The OCC’s preamble emphasizes that escrow accounts are core risk‑management tools in mortgage lending and that flexibility over pricing and compensation terms is a “core component” of banks’ mortgage lending powers. Codifying these powers, the OCC says, is meant to reduce uncertainty around escrow practices and support safe, sound, and efficient real estate lending.

The second rule, Preemption Determination: State Interest‑on‑Escrow Laws, goes a step further by issuing a formal determination that federal law preempts state laws that restrict OCC‑regulated banks’ flexibility to decide whether and to what extent to pay interest or other compensation on funds in real estate escrow accounts or assess fees in connection with such accounts. The OCC explicitly identifies New York’s interest‑on‑escrow law (the statute at issue in Cantero) and 13 other “substantively equivalent” state and territorial laws that, according to the OCC, deprive national banks of the flexibility to exercise the discretion granted to them by federal law. Accordingly, the final rule concludes that these 13 other state interest-on-escrow laws are preempted. The agency notes that the Second Circuit’s Cantero remand decision cited the proposed versions of its escrow accounts and preemption determination rules, and it frames these final rules and the court’s opinion together as providing “much‑needed clarity” on National Bank Act preemption in this area.

Our Take

The OCC’s final rules represent another step by the agency to strengthen federal preemption principles as applied to national banks and to restrict states’ abilities to impose limitations on OCC-regulated banks. In April of this year, in a scenario similar to the OCC’s escrow-related final rules, the OCC issued an interim final rule and an interim final order clarifying that federal law permits national banks to charge certain fees in connection with payment card activities and specifically confirming that federal law preempts Illinois’s Interchange Fee Prohibition Act, which prohibits banks, payment networks, and other entities from receiving or charging an interchange fee on the tax or gratuity portions of electronic payment transactions. While these recent attempts by the OCC to directly influence ongoing litigation via rulemaking are significant, it is important to keep in mind that the OCC’s rules are not binding on courts’ decisionmaking, particularly in light of the Supreme Court’s 2024 decision in Loper Bright.