Banking and Finance Law Daily Wrap Up, PREEMPTION—D. Or.: States challenge OCC preemption of mortgage escrow-interest laws, (Aug 12, 2026)

By Shashi Kant, BALLB, LLM

States challenge OCC determination preempting state escrow-interest laws, arguing the agency exceeded its authority and violated the Administrative Procedure Act.

A coalition of states sued the Office of the Comptroller of the Currency challenging the agency’s final determination that federal law preempts state laws requiring national banks and federal savings associations to pay interest on certain mortgage escrow funds. The complaint filed in the U.S. District Court for the District of Oregon, argues that the OCC exceeded its authority under the National Bank Act and Dodd-Frank Act and violated the Administrative Procedure Act by determining that state escrow-interest requirements are preempted. The states seek declaratory and injunctive relief against the OCC and Comptroller of the Currency Jonathan V. Gould (State of Oregon v. Office of the Comptroller of the Currency, No. 3:26-cv-01672 (D. Or.)).

OCC preemption determination. The lawsuit follows two final actions issued by the OCC in May concerning mortgage escrow accounts (see Banking and Finance Law Daily, May 18, 2026). One rule establishes that national banks and federal savings associations have authority to establish and maintain real estate lending escrow accounts and provides them with discretion over the terms and conditions of those accounts, including whether and to what extent to pay interest or other compensation. The OCC simultaneously issued a preemption determination concluding that federal law preempts state laws restricting that discretion. The agency determined that New York’s interest-on-escrow law and substantively equivalent laws in 13 other states and territories are preempted. Those jurisdictions include California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont and Wisconsin, as well as Guam and the U.S. Virgin Islands.

The OCC said the rules were intended to provide clarity concerning escrow practices and reaffirm the authority of federally chartered institutions to determine the terms of their products and services. The agency reasoned that state requirements could interfere with national banks’ federally authorized powers by limiting their ability to determine the costs and pricing associated with escrow accounts.

States challenge federal authority. The states contend that the OCC improperly expanded federal preemption beyond the limits established by Congress. They argue that state laws governing interest on escrow accounts regulate the treatment of homeowners’ funds and do not prevent national banks from offering mortgage escrow accounts. The complaint challenges the OCC’s conclusion that state requirements substantially interfere with national-bank powers. The states argue that the agency failed to identify a sufficient conflict between federal banking powers and state consumer-protection requirements and instead relied on the proposition that national banks must retain flexibility to determine the terms and pricing of their products.

The states also contend that the OCC failed to adequately consider the effects of preemption on homeowners and state-chartered financial institutions. State officials have argued that national banks should not be permitted to avoid consumer protections that continue to apply to state-chartered competitors.

Cantero and circuit split. The case arises against the backdrop of continuing litigation over the scope of National Bank Act preemption following Cantero v. Bank of America, N.A. The Supreme Court in Cantero reaffirmed the conflict-preemption framework associated with Barnett Bank v. Nelson and codified by Dodd-Frank but did not itself decide whether New York’s interest-on-escrow law was preempted. Subsequent appellate decisions have produced a circuit split. The Second Circuit concluded that New York’s law was preempted, while the First and Ninth Circuits reached contrary conclusions concerning similar state requirements. The OCC cited that uncertainty when explaining why it issued its own preemption determination. The agency said the litigation had created uncertainty not only concerning escrow-interest laws but also concerning the application of National Bank Act preemption more generally.

OCC’s reasoning. The OCC based its determination on the principle that federal law preempts state requirements that prevent or significantly interfere with a national bank’s exercise of federally authorized powers. The agency concluded that national banks have authority to offer and establish the terms of mortgage escrow accounts and that state requirements concerning interest payments interfere with that authority. It pointed to the potential for banks to offset the costs of complying with state requirements through other fees or pricing decisions, reduce the availability of escrow accounts, or reduce mortgage lending. The OCC also said such consequences could disproportionately affect lower-income borrowers. The OCC further concluded that the state laws identified in its determination have substantively equivalent terms and effects. The agency said the laws generally require interest to be paid on qualifying escrow funds and, in some cases, restrict fees associated with escrow accounts.

APA challenge. The states also allege that the OCC violated the Administrative Procedure Act. They contend that the agency’s conclusions were arbitrary and capricious and were not adequately supported by the administrative record. The states challenge the OCC’s reliance on potential effects such as increased compliance costs, changes in mortgage pricing and reductions in lending. They argue that the agency did not adequately establish that state escrow-interest laws actually interfere with the exercise of national-bank powers to the extent required for preemption. The states therefore ask the court to declare the OCC’s preemption determination unlawful and prevent the agency from giving it effect.

Impact on homeowners. The dispute concerns mortgage escrow accounts into which borrowers commonly make payments for property taxes and homeowners’ insurance. Several states require lenders to pay interest on qualifying escrow balances. State officials characterize those requirements as consumer protections that ensure homeowners receive compensation for money held by lenders. They argue that the OCC’s determination would allow federally chartered banks to avoid those requirements while leaving comparable state-chartered institutions subject to state law. The states also argue that the OCC’s action could have broader consequences for state authority over consumer financial protection. In their view, allowing the OCC to treat limits on national-bank flexibility as sufficient grounds for preemption could make it easier for federal banking regulators to displace other state requirements affecting federally chartered institutions.

Broader preemption implications. The litigation could therefore have significance beyond escrow accounts. The OCC has expressly relied on its authority under Dodd-Frank to make preemption determinations concerning state consumer financial laws under the Barnett Bank standard. The case also provides another opportunity for the federal courts to address the meaning of “significant interference” under the National Bank Act following Cantero and the subsequent circuit split. The states ask the district court to invalidate the OCC’s preemption determination and related rulemaking. The OCC has not yet responded to the complaint.

AFR statement. Americans for Financial Reform said in a released statement that “[i]f the OCC approach is allowed to stand, it would block state efforts to protect people from harmful financial practices and give huge national banks an unfair advantage over smaller state banks.” Tom Feltner, associate director of consumer policy at Americans for Financial Reform Education Fund, added. “This lawsuit protects borrowers rights on escrow funds and is a vitally important step towards preserving those laws. It will also block the OCC from granting blanket immunity from other commonsense protections and pushes back against continued consolidation of Wall Street corporate power.”

Attorneys: Brian Simmonds Marshall, Oregon Department of Justice, for State of Oregon. Christian Reigstad, NYS Office of the Attorney General, for State of New York. Caroline E. Wilson, Office of the Attorney General, for State of California. Rebecca Borne, Office of the Attorney General, for State of Connecticut.

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