OCC Interest-on-Escrow Preemption: What It Means for National Banks

Why This Preemption Matters

For years, national banks and federal savings associations faced conflicting obligations when managing mortgage escrow accounts. Some states required the payment of interest on escrow funds, while federal law granted banks broad discretion. This patchwork created compliance headaches and fueled extensive litigation.

Now, the Office of the Comptroller of the Currency (OCC) has stepped in with a final preemption determination. It clarifies that the National Bank Act preempts certain state interest-on-escrow laws—giving banks nationwide the flexibility to manage escrow accounts without state-imposed interest or fee mandates.

This change is a direct response to legal uncertainty and aims to promote a uniform national banking framework. For compliance officers, the immediate task is to understand what's preempted and adapt internal practices accordingly.

What the OCC Decided

The OCC’s determination, published at 90 FR 61093 on December 30, 2025, concludes that:

• New York’s General Obligations Law § 5-601 is preempted by the National Bank Act.
• Thirteen other states have substantively equivalent laws, and those are preempted as well.
• The preemption applies equally to federal savings associations under the Home Owners’ Loan Act.

The OCC emphasized that these state laws prevent or significantly interfere with a national bank’s exercise of its federally authorized powers—specifically, the power to decide whether and how much interest to pay on escrow and whether to charge fees.

Which State Laws Are Preempted?

Beyond New York, the OCC identified equivalent laws in: California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont, and Wisconsin, among others. Because the determination covers any state law with substantively equivalent terms, banks should watch for additional states that may have similar statutes.

Key takeaway: If your bank operates in any of these states and has been paying interest or restricting fees due to state law, those obligations no longer apply to national banks and federal savings associations.

The Legal Basis: National Bank Act Preemption

The OCC’s authority to issue preemption determinations stems from the National Bank Act and the legal standards set by the Supreme Court. Under the Dodd-Frank Act (12 U.S.C. § 25b), the OCC must act on a case-by-case basis, supported by substantial evidence. The OCC provided a detailed legal analysis, demonstrating that state interest-on-escrow laws directly conflict with banks’ escrow account powers.

The preemption does not require a total elimination of flexibility; even laws that merely restrict a bank’s discretion are covered. This broader reading closes a loophole that some states might have used to impose indirect controls.

How the Determination Aligns with the Escrow Powers Rule

Coinciding with this preemption, the OCC issued a final Escrow Powers Rule that codifies national banks’ authority to manage escrow accounts without state interference. Together, these actions create a double layer of protection: a direct preemption of conflicting state laws and an affirmative federal regulation that occupies the field.

For banks, this means a more certain legal environment. You no longer need to parse ambiguous state statutes or worry about litigation risk in covered jurisdictions.

Immediate Compliance Actions for Banks

Now is the time to translate this regulatory win into operational changes. Here are three concrete steps to ensure your institution is fully compliant and leveraging the new flexibility.

1. Review and Revise Escrow Account Policies

First, inventory your current escrow interest payment practices in all affected states. Identify any policy documents, product guides, or operational manuals that mandate interest payments or prohibit certain fees based on state law. Update these immediately to reflect the preemption.

Pay special attention to states that are not explicitly listed but may have substantively equivalent terms. If a state law requires any form of interest or fee restriction on escrow accounts, it likely falls within the OCC’s determination. When in doubt, consult with legal counsel.

2. Update Procedures and Systems

Next, adjust your loan servicing systems to stop automatically calculating and disbursing escrow interest for accounts in preempted states. Ensure that any customer-facing disclosures or statements no longer reference state-mandated interest unless you choose to pay it voluntarily.

Also, review your fee schedules. If you were previously prohibited from charging maintenance fees on escrow accounts in certain states, those restrictions are lifted. You now have the option to assess reasonable fees—but be mindful of broader UDAAP considerations (see our UDAAP in mortgage lending guide for guidance on fair fee practices).

3. Monitor for Additional State Law Developments

The OCC’s determination is not a one-time fix. States may challenge the preemption in court or enact new laws designed to achieve similar outcomes through different means. Staying ahead requires robust regulatory tracking. For instance, some commenters urged the OCC to expand the preemption to other escrow requirements; the agency declined but left the door open for future determinations.

Tools like Reglith automate monitoring of federal and state regulatory changes, helping you catch emerging risks without manual legwork. A well-structured compliance calendar can also ensure that key updates are actioned on time.

Key Takeaways

• The OCC’s final preemption determination nullifies state laws that require national banks and federal savings associations to pay interest on mortgage escrow accounts or restrict related fees.
• Fourteen states are directly affected, including New York, California, Connecticut, and others with substantively equivalent laws.
• The determination, effective December 30, 2025, provides clear legal backing to exercise discretion in escrow management.
• Immediate compliance steps include revising escrow policies, updating servicing systems, and lifting unnecessary fee prohibitions.
• Stay vigilant: State-level challenges or new regulations may emerge. Use automated monitoring to keep your program current.