New Federal Rules Could End Mortgage Escrow Interest for Some Homeowners
Attorneys general in 10 states have filed a federal lawsuit seeking to invalidate a pair of rules from the Office of Comptroller of the Currency that allow certain banking institutions to sidestep laws requiring them to pay interest of mortgage escrow accounts.
The lawsuit, filed in U.S. District Court in Oregon, names the OCC and Comptroller Jonathan Gould as defendants.
According to CNBC, one new OCC rule codified the power of national banks and federal savings associations to determine the terms of escrow accounts, including whether to pay interest or charge fees. The report said that the other rule says federal law preempts state laws when it comes to OCC-regulated banks’ flexibility in determining those aspects of escrow accounts.
The OCC issued the new rules in May, and they became effective June 18.
“The rules basically allow OCC-regulated banks not to pay interest on mortgage escrow accounts,” said Solomon Maman, an Attorney in Chicago with expertise in financial services law.
For many homeowners their mortgage payment includes amounts that go into an escrow account in addition to principal and interest payments each month. That account then pays out homeowners insurance premiums and property taxes, as well as mortgage insurance if the borrower is required to carry it, CNBC said.
Most Mortgage Holders Have Escrow Accounts
Roughly 80% of mortgage holders have an escrow account, according to Lereta, which provides real estate tax and flood data to mortgage servicers. Those without an escrow account pay insurance and taxes directly.
The federal lawsuit notes that homeowners make monthly escrow payments, but property taxes and insurance premiums are generally paid annually or semiannually. This means escrow accounts can “carry significant balances throughout the year,” the lawsuit reads.
For perspective, the average annual property tax bill for the 87 million owner-occupied homes in the U.S. was $4,271 in 2024, according to an analysis by the National Association of Homebuilders. The average annual cost of homeowners insurance is projected to reach $3,057 by the end of 2026, according to Insurify.com, an insurance-comparison site.
The lawsuit noted that there are 14 states and U.S. territories that have laws requiring interest be paid on escrow balances. Exactly how much banks must pay in interest depends on the state.
For instance, in Rhode Island, CNBC noted that escrow accounts must earn the same interest as a regular savings account, according to the suit. In Maryland, meanwhile, lenders are required to pay annual interest at a rate based on the yield of one-year U.S. Treasuries.
CNBC reported that the average rate on traditional savings accounts is 0.63%, citing Bankrate. In comparison, the yield on a one-year Treasury is just shy of 4%.
