California, Nine States Sue to Block OCC Rule Letting National Banks Avoid Interest on Mortgage Escrows

California and nine other states sued the Office of the Comptroller of the Currency on Tuesday, seeking to block new federal banking rules that would stop certain state laws from requiring national banks to pay interest on mortgage escrow accounts.

The lawsuit, filed Aug. 11 in the U.S. District Court for the District of Oregon, centers on a practical issue for homeowners: whether banks must pay interest on money borrowers are required to set aside for property taxes and insurance. In California, state law requires certain financial institutions to pay at least 2% simple interest a year on many covered residential escrow accounts. The states say the federal rules could cost borrowers interest payments and give nationally chartered banks an advantage over state-chartered competitors.

The suit challenges two actions by the OCC, the federal agency that oversees national banks, published in the Federal Register on May 19 and effective June 18. One, titled “Real Estate Lending Escrow Accounts,” or the Escrow Powers rule, says national banks may establish and maintain mortgage escrow accounts and set their terms, including whether and to what extent to pay compensation on escrow funds.

The second, “Preemption Determination: State Interest-on-Escrow Laws,” concludes that federal law preempts New York’s interest-on-escrow statute and that 13 other state or territorial laws, including California’s, are substantively equivalent. In effect, the states argue, the OCC is trying to nullify state requirements for national banks and federal savings associations to pay interest on escrow balances.

California Attorney General Rob Bonta joined attorneys general from Oregon, New York, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Rhode Island and Vermont in filing the case, No. 3:26-cv-01672-SI. The defendants are the OCC and Jonathan V. Gould, in his official capacity as comptroller of the currency.

The complaint asks the court to declare both rules unlawful and vacate them under the Administrative Procedure Act, the federal law that governs how agencies issue regulations. The states allege the OCC exceeded its statutory authority and acted arbitrarily and capriciously in adopting the rules.

Mortgage escrow accounts are commonly used to hold money collected with a borrower’s monthly payment so the lender or servicer can later pay property taxes and homeowners insurance. Some states require lenders to pay interest on those funds to prevent borrowers from effectively providing an interest-free deposit on money they are obligated to set aside.

The complaint says borrowers could lose interest payments if the OCC rules remain in place, including in some cases “thousands of dollars” annually. That claim is an allegation by the plaintiff states, not a finding by the court. The states also argue the rules would create an uneven market because the OCC’s preemption determination would apply only to federally regulated institutions, not state-chartered banks.

The fight comes against a long-running legal backdrop over when federal banking law overrides state consumer protection rules. In 2018, the U.S. Court of Appeals for the Ninth Circuit held in Lusnak v. Bank of America that California’s escrow-interest law was not preempted. In 2024, the U.S. Supreme Court said in Cantero v. Bank of America that courts must apply the Barnett Bank standard in such disputes, asking whether a state law prevents or significantly interferes with a national bank’s powers.

In a state Justice Department press release, Bonta said, “The Trump Administration is attempting to slash critical state consumer protection laws that protect homeowners.”