OCC Mortgage Escrow Rules Add Fuel To Preemption Debate

On Dec. 23, 2025, the Office of the Comptroller of the Currency launched an offensive in an ongoing regulatory battle over the powers reserved for national banks.

The agency issued two coordinated proposals designed to preempt state laws requiring national banks to pay interest on mortgage escrow accounts — laws that have protected homeowners in 12 states for nearly half a century.

The move represents a bold assertion of federal preemption authority in an apparent response to several court cases finding that the National Bank Act and existing OCC guidance do not preempt these state laws.

The Dual Proposals: A Coordinated Strategy

The OCC's approach consists of two complementary rulemakings.

The first proposal codifies what the agency describes as national banks' long-standing authority to establish and maintain real estate lending escrow accounts and to exercise business judgment regarding their terms and conditions. This includes decisions about whether to pay interest or other compensation to customers and whether to assess related fees.

The second proposal issues a formal preemption determination concluding that the NBA preempts state laws that eliminate national banks' flexibility in these matters. Specifically, the OCC determined that New York's General Obligations Law Section 5-601 is preempted by federal law, along with substantially equivalent laws in 11 other states: California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont and Wisconsin.

The OCC's determination would exempt national banks and federal savings associations from these requirements, allowing them to retain all interest that accrues on consumer escrow accounts.

According to the OCC, the proposals emphasize federal preemption as a "critical tool for reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth. The agency argues that codifying this long-standing power will provide clarity and reduce uncertainty regarding bank escrow practices, potentially incentivizing increased bank real estate lending.

Notably, the proposals were released on Dec. 23, with a 30-day comment period beginning after they were published in the Federal Register on Dec. 30. Although state regulators and key consumer advocates requested a 90-day comment period, the OCC did not grant any extensions.

The Preemption Framework: From Barnett Bank to Cantero

The legal landscape for federal preemption of state banking laws was fundamentally shaped by the U.S. Supreme Court's 1996 decision in Barnett Bank of Marion County NA v. Nelson. In that case, the court established that state laws are preempted when they "prevent or significantly interfere with the national bank's exercise of its powers."

Congress codified the Barnett Bank standard in 2010 in the Dodd-Frank Act at Title 12 of the U.S. Code, Section 25b. Section 25b expressly incorporated the Barnett Bank framework and authorized the OCC to issue preemption determinations regarding which types of state consumer financial laws are preempted for national banks under this standard.

The Supreme Court revisited this framework in its unanimous May 2024 decision in Cantero v. Bank of America NA. That case involved the exact issue now before the OCC: whether New York's interest-on-escrow law is preempted by the NBA.

In Cantero, the U.S. District Court for the Eastern District of New York had found that the New York law was not preempted. That decision was reversed by the U.S. Court of Appeals for the Second Circuit, which held that the law was preempted because the state law "would exert control over national banks' power to create and fund escrow accounts."

Writing for the Supreme Court, Justice Brett Kavanaugh explained that determining preemption requires "a practical assessment of the nature and degree of the interference caused by a state law." Critically, the Supreme Court declined to establish a bright-line test. Instead, it instructed lower courts to conduct a "nuanced comparative analysis" by examining the Supreme Court's precedents to determine whether the state law's interference with national bank powers resembles cases where preemption was found or cases where it was not.

The court vacated the Second Circuit's decision finding preemption and remanded for this more detailed analysis.

Post-Cantero Circuit Cases Find in Favor of Preemption

Although the Cantero case is still pending in the Second Circuit on remand, there have been two other circuit court cases following the Supreme Court's opinion and both concluded that the state interest-on-escrow laws were not preempted.

In September 2025, the U.S. Court of Appeals for the First Circuit found in Conti v. Citizens Bank NA that Rhode Island's interest-on-escrow law is generally applicable to bank products and does not discriminate against national banks.

The First Circuit noted that the NBA did not expressly prohibit Rhode Island's interest-on-escrow requirements nor reserve to national banks the exclusive power to decide whether to pay interest on escrow accounts. The court also found that the law did not interfere with bank powers or create significant burdens for the national bank.

Similarly, in October 2025 when the U.S. Court of Appeals for the Ninth Circuit addressed California's interest-on-escrow in Kivett v. Flagstar Bank FSB, it found that the NBA did not preempt the state law. This was a reaffirmation of its 2018 Lusnak v. Bank of America decision, which also held that federal law does not preempt California Civil Code Section 2954.8(a).

Following the Supreme Court's Cantero ruling, the Supreme Court had vacated the Ninth Circuit's original judgment and remanded for reconsideration. However, on remand the Ninth Circuit again held that California's law is not preempted.

The majority reasoned that Lusnak was not clearly irreconcilable with Cantero, noting that Lusnak had properly applied the Barnett Bank test and that nothing in Cantero suggested it was wrongly decided. The dissenting judge, however, argued that applying Cantero properly would lead to a finding of preemption.

The OCC's proposed preemption rules are a direct response to the decisions in Conti and Kivett, as the OCC claims that "there remains substantial uncertainty" about federal preemption and state interest-on-escrow laws and ambiguity about NBA preemption.

State Regulators Push Back

The Conference of State Bank Supervisors, joined by the American Association of Residential Mortgage Regulators, responded to the OCC's proposals with sharp criticism. In a press release accompanying the Jan. 29, 2026, comment letter, CSBS President and CEO Brandon Milhorn declared: "No matter how hard they try, the OCC cannot regulate around Congress and the courts."

The state regulators' objections operate on multiple levels. They argue that the proposals fundamentally misapply the legal standard for preemption under Section 25b. According to the CSBS, the OCC appears to be asserting that any state law imposing an unnecessary burden on national banks is preempted — a standard that the CSBS characterizes as falling well below the "prevents or significantly interferes" standard expressly embodied in the NBA, reaffirmed in Cantero and consistently applied by courts.

The CSBS letter argues that the OCC employed the same type of cursory analysis rejected in Cantero and that the OCC failed to consult with the Consumer Financial Protection Bureau in the process, as it is required to do by Section 25b.

The state regulators contend that the proposals would create significant competitive inequities. State-chartered banks and nonbank mortgage servicers would be subject to state interest-on-escrow requirements, while national banks would be exempt. This would create what the CSBS describes as an "unlevel playing field among similarly situated financial institutions engaged in mortgage servicing."

The state regulators emphasize the consumer protection implications. In their view, the proposals unfairly take money from homeowners and give it to national banks when "housing affordability in the United States has reached what is widely considered a crisis level [and] hazard insurance and property taxes are surging nationwide and contributing to overall unaffordability."

Making matters worse, consumers typically have no choice about who services their mortgage, meaning they could lose the right to interest on their escrow accounts based solely on whether their servicer happens to be a national bank or not.

The National Consumer Law Center joined the opposition, arguing that the proposals would create market distortions. But on the other side of this debate, the American Bankers Association and the U.S. Chamber of Commerce filed a Jan. 29 joint comment letter strongly supporting the OCC's proposals. They argue that state interest-on-escrow laws are already preempted under existing federal law and that the OCC's action simply provides much-needed clarity.

The Dodd-Frank Act's Framework and Congressional Intent

At the heart of this controversy lies a fundamental question about congressional intent.

When Congress enacted Section 25b of the Dodd-Frank Act, it was responding to what many viewed as the OCC's overly aggressive preemption campaign in the years leading up to the 2008 financial crisis. During that period, wholesale preemption of state mortgage laws was identified as a key contributor to the mortgage crisis.

In 2004, Congress explicitly sought to undo the standards adopted by rules, orders, and interpretations issued by the OCC and to revise the standard the OCC could use preempt states' consumer protection laws going forward. The question now is whether the OCC's proposals represent a legitimate application of the Barnett Bank standard Congress codified, or whether they constitute an end-run around congressional limits on preemption.

The CSBS press release argues that the proposals attempt to "erode the statutory preemption standard by regulation — manufacturing a conflict with state law and then asserting, without authority, that any state consumer protection law is void simply because it might impose some burden." From this perspective, the OCC is essentially trying to resurrect the broader preemption regime that Congress rejected in the Dodd-Frank Act.

The Road Ahead

The OCC's proposals face an uncertain path forward. If the OCC proceeds to finalize the rules, it will almost certainly face legal challenges from state regulators, consumer advocates and potentially state attorneys general.

The core legal question will be whether the OCC has properly applied the Barnett Bank and Cantero framework or whether it has overstepped its authority. The outcome will have profound implications not just for mortgage escrow accounts, but for the broader framework of federal banking preemption.

A victory for the OCC could embolden the agency to issue similar preemption determinations regarding other state consumer protection laws. And a defeat could reinforce limits on federal preemption and preserve greater state authority to regulate national banks.

Republished with permission. This article, "OCC Mortgage Escrow Rules Add Fuel To Preemption Debate," was published by Law360 on February 17, 2026. (login required)