The OCC's Escrow Preemption Ruling: A New Federal-State Gap in Mortgage Servicing
Federal regulators determined this year that national banks do not have to pay interest on mortgage escrow accounts even in states that require it. The Supreme Court said that determination is not self-executing. The gap between those two statements is now the operating environment for mortgage servicers and borrowers in several states.
Several states — New York, California, Connecticut, Minnesota, Maryland, and Oregon among them — have laws requiring mortgage servicers to pay interest on funds held in escrow accounts. These accounts collect monthly reserves from borrowers to cover property taxes and homeowner's insurance. The interest requirement is a consumer protection measure: borrowers whose taxes and insurance costs are being held and managed by a servicer receive a small return on those funds.
For years, federally regulated national banks and federal savings associations argued that these state requirements were preempted by federal banking law — specifically, by the National Bank Act and regulations issued by the Office of the Comptroller of the Currency. In 2024, the Supreme Court addressed the preemption question directly. The OCC issued its own preemption determination in 2026. Neither fully resolved the gap. They may have widened it.
The Four Dimensions of This Gap
1. The OCC's 2026 Preemption Determination
The OCC issued a preemption determination in 2026 — OCC News Release 2026-37b — concluding that its regulations governing national bank escrow practices preempt state laws that require interest payments on mortgage escrow accounts. The OCC's position is that state interest-on-escrow requirements "prevent or significantly interfere with" the exercise of national bank powers as defined in 12 C.F.R. Part 34 and related regulations. Under the OCC's reading, national banks subject to federal escrow regulations need not comply with conflicting state interest requirements. The determination applies to national banks and federal savings associations (FSAs); FSAs are regulated under the parallel framework of the Home Owners' Loan Act and the Office of Thrift Supervision regulations now housed at the OCC.
2. The Cantero v. Bank of America Backdrop
The OCC's determination lands on complicated legal ground set by the Supreme Court's 2024 decision in Cantero v. Bank of America, N.A., 602 U.S. 205 (2024). In Cantero, the Court rejected both a broad and a narrow preemption standard and held that courts must conduct a careful, fact-specific analysis of whether a state consumer protection law "prevents or significantly interferes with" the exercise of national bank powers — the standard drawn from Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). The Court explicitly declined to adopt either the OCC's own preemption framework or a bright-line rule that would make preemption analysis predictable across all state escrow laws. The practical result: the OCC can issue a preemption determination, but courts are not bound to follow it. A borrower in New York who sues Bank of America for not paying escrow interest can still argue that, under a Cantero-compliant fact-specific analysis, New York's law is not preempted on the specific facts of their loan.
3. The State Enforcement Dimension
The OCC's determination binds the federal regulator of national banks and federal savings associations (FSAs), but it does not bind state attorneys general. New York's Attorney General, California's Department of Financial Protection and Innovation, and parallel agencies in other affected states retain enforcement authority over consumer protection laws — and the extent to which federal preemption removes that authority is precisely what remains unresolved under Cantero. State enforcement actions are possible. State courts will apply the Cantero fact-specific analysis. The outcome of litigation will depend on the specific state law, the specific OCC regulation at issue, and how a given court weighs the interference with national bank powers. The OCC's determination will be persuasive authority in those proceedings — but it is not binding on courts, and several state AGs have signaled skepticism about broad preemption claims in the wake of Cantero.
4. The Borrower Uncertainty Problem
The gap's practical effect falls on borrowers in escrow-interest states who cannot get a clear answer to a basic question: is my servicer legally required to pay interest on my escrow account? The answer depends on whether the servicer is a national bank, a federal savings association, or a state-chartered institution; on the specific state law; on the OCC regulation in question; and, ultimately, on how courts will apply Cantero to the specific facts. None of those variables is easily accessible to a borrower. The servicer is not required to disclose its preemption analysis to the borrower. The gap is invisible by default — which means the people most affected by it are the least likely to know it exists.
Why the OCC's Determination Doesn't Close the Gap
The standard account of a regulatory gap is that ambiguity exists because a rule hasn't been written. This gap is different: the rule has been written — twice. New York's legislature wrote one rule. The OCC wrote another. The gap is the collision between them, and the collision will not resolve without judicial decisions that the OCC's determination cannot manufacture.
The Cantero fact-specific analysis means that preemption will be litigated loan type by loan type, state by state, and servicer by servicer, rather than resolved in a single declaratory ruling. That process will take years. In the interim, national banks and federal savings associations (FSAs) operating in escrow-interest states face a compliance decision under genuine legal uncertainty: follow the OCC's determination and risk state enforcement, or pay escrow interest as state law requires and accept the cost.
Sophisticated servicers will make that call with counsel. Borrowers whose escrow accounts are generating or not generating interest will not know the legal theory behind the outcome they receive.
How Long This Gap Is Likely to Last
The trajectory points toward years, not months. Cantero remanded the case to lower courts for the fact-specific analysis it prescribed — those proceedings continue. Other litigation challenging national bank escrow practices in New York and California is working through state and federal court systems. The OCC's 2026 determination will likely generate its own challenges. Appellate courts may eventually issue rulings that create enough precedent to stabilize the analysis for the most common loan and servicer configurations. Congress could theoretically resolve the preemption question by statute, but no legislation targeted at the escrow interest issue is currently advancing.
The gap will narrow as courts issue decisions. It will not close until there is a stable body of case law — or a statute — that eliminates the fact-specific variability Cantero requires.
The content on this site is legal information, not legal advice. It does not create an attorney-client relationship and cannot substitute for consultation with a licensed attorney about your specific situation.
References & Sources
- OCC News Release 2026-37b, "Final Rule — Preemption Determination: State Interest-on-Escrow Laws," 2026. Source: occ.gov/news-issuances/news-releases/2026/nr-occ-2026-37b.pdf. Official OCC preemption determination regarding state laws requiring interest payments on mortgage escrow accounts held by national banks.
- Cantero v. Bank of America, N.A., 602 U.S. 205 (2024) — Supreme Court decision rejecting bright-line preemption standards and requiring courts to conduct a careful, fact-specific analysis under the Barnett Bank "prevents or significantly interferes with" standard when determining whether state consumer protection laws are preempted by the National Bank Act.
- Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) — foundational Supreme Court precedent establishing the "prevents or significantly interferes with" standard for National Bank Act preemption of state law; applied and refined in Cantero.
- National Bank Act, 12 U.S.C. § 1 et seq.; OCC escrow regulations, 12 C.F.R. Part 34 — federal statutory and regulatory framework governing national bank real estate lending and escrow practices; basis for OCC's 2026 preemption determination.
- New York Banking Law § 6-k — New York's interest-on-escrow statute, requiring mortgage lenders to pay interest on escrow account balances at a rate set annually by the superintendent; among the state laws at issue in ongoing preemption litigation. See also California Civil Code § 2954.8 (similar requirement for California real property loans).