OCC Proposes Rules to Preempt State Laws Requiring Interest Payments on Mortgage Escrow Accounts

Summary

On December 30, 2025, the Office of the Comptroller of the Currency (“OCC”) published two Notices of Proposed Rulemaking (“NPRs”) addressing whether state laws that require banks to pay minimum interest rates on mortgage escrow accounts are preempted as applied to national banks. The NPRs respond to a number of state interest-on-escrow laws—notably, New York’s—and to uncertainty following the Supreme Court’s 2024 decision in Cantero v. Bank of America, N.A. regarding whether such laws are preempted as to national banks under the National Bank Act (“NBA”).[1]

The first NPR would recognize national banks’ longstanding authority to establish and maintain mortgage escrow accounts and to exercise business judgment over the terms of those accounts, including whether and to what extent interest or other compensation is paid.[2] The second NPR would issue a formal OCC preemption determination concluding that the NBA preempts New York’s law and similar laws in eleven other states because they prevent or significantly interfere with a national bank’s power to set interest rates on mortgage escrow accounts.[3]

These NPRs, if adopted, would provide additional support for the proposition that the NBA preempts state law requirements relating to interest rates on mortgage escrow accounts. Specifically, the OCC’s thoughtfully articulated rationale could assist national banks in the multiple outstanding cases on this issue.[4] More broadly, the OCC explained the role of federal preemption as “a critical tool for reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth,”[5] and the NPRs provide a more definitive statement of general preemption principles. Public comments on both proposals are due on or before January 29, 2026.

Background

State laws in New York and at least eleven other states[6] require banks to pay minimum interest on certain mortgage escrow accounts and, in some cases, restrict the assessment of related fees. National banks have argued that these laws improperly interfere with their federally authorized real estate lending powers,[7] while plaintiffs have argued that these laws are within a state’s power to enact consumer protection measures.[8]

Under longstanding Supreme Court precedent, state laws are preempted where they “prevent or significantly interfere with” a national bank’s exercise of its federal powers.[9] In Cantero, the Supreme Court unanimously reaffirmed that standard and instructed lower courts to apply it through a “practical assessment” informed by the text and structure of the laws at issue, past Supreme Court precedent, and common sense.[10] Specifically, courts are to conduct a “nuanced comparative analysis” by evaluating the state law at issue against previous Supreme Court cases in which the Court had or had not found the law preempted.[11] The Court, however, did not reach a conclusion as to whether the state mortgage escrow law before it was preempted. Since Cantero, lower courts have struggled to apply this framework to state interest-on-escrow laws, as illustrated by the Ninth Circuit’s recent divided panel decision in Kivett v. Flagstar Bank, FSB, which is currently the subject of an en banc petition.[12] The OCC’s proposals are designed to address this “substantial uncertainty” as well as “ambiguity regarding how to evaluate National Bank Act preemption generally,”[13] and to provide additional guidance in applying the Cantero standard.

The OCC’s Proposed Regulations

The two NPRs clarify and codify the right of national banks to set the terms and rates of their mortgage escrow products.

First, the OCC proposes to codify that “[t]he terms and conditions of escrow accounts, including whether and to what extent banks pay interest or other compensation, are ultimately a business judgment made by each bank in accordance with safe and sound banking principles.”[14] According to the OCC, this discretion is a key component of national banks’ lending powers and has long been exercised under federal law.[15] If finalized, the OCC explains that state interest-on-escrow laws would directly conflict with this federal regulatory authority, providing an independent basis for conflict preemption.[16]

Second, the OCC concurrently proposes to issue a preemption determination under Section 25b of the Dodd-Frank Act, concluding that “(1) the National Bank Act preempts New York’s . . . interest-on-escrow law; (2) eleven other states have laws with substantively equivalent terms; and (3) these substantively equivalent state laws are also preempted.”[17] The OCC also seeks comment on whether additional states have laws with substantively equivalent terms.

In support of preemption, the OCC explains that mandatory interest-on-escrow laws deprive national banks of flexibility that federal law deliberately preserves, interfere with banks’ efficiency and effectiveness in exercising their real estate lending powers, and qualify those powers in an “unusual”[18] way by mandating pricing terms and limiting the ability to offset costs through fees.[19] The OCC analogizes these laws to state restrictions the Supreme Court has previously found preempted.[20]

In addition, the OCC, following the Supreme Court’s mandate in Cantero, synthesizes the precedents cited by the Court to establish a general standard of preemption. The OCC explains that the “prevents or significantly interferes” standard is met if a state law (i) “interferes with [a national bank’s] critical flexibility,” (ii) “interferes with a national bank’s efficiency and effectiveness,” or (iii) “qualifies a federal power in an unusual way.”[21] The OCC cites each of these three standards as being implicated by a state requirement relating to payment of interest on a mortgage escrow account. The OCC contrasts “generally applicable [state] infrastructure laws,”[22] which are not preempted.

Implications

If these concurrent proposed rules are finalized, survive legal challenges, and are given deference by the courts, they would support the idea that “state interest-on-escrow laws would directly conflict with the federal power . . . and would thus be preempted.”[23] The OCC’s thoughtfully articulated rationale behind its preemption determination would “provide much needed clarity to banks and other stakeholders,”[24] assisting national banks on the multiple outstanding cases on this issue.[25] Finally, the OCC explained that federal preemption remains “a critical tool for reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth.”[26] These NPRs provide a more definitive statement of general preemption principles.