On December 23, the OCC published two notices of proposed rulemaking in the Federal Register that would clarify and reinforce federal banking authorities over interest-on-escrow laws and real estate lending escrow accounts. Specifically, in the first proposed rule, the OCC proposed a determination that certain state interest-on-escrow laws are preempted by the National Bank Act. In the second proposed rule, the OCC would “codify” the authority of national banks and federal savings associations to establish and maintain real estate lending escrow accounts, contending that RESPA “implicitly recognizes” the flexibility of banks in managing escrow funds. The OCC noted that its proposed rulemaking follows extensive litigation, with multiple circuits and the U.S. Supreme Court having considered the issue, and that substantial uncertainty regarding how to evaluate National Bank Act preemption of state interest-on-escrow laws remains.

Preemption Determination on State Interest-on-Escrow Laws

On December 23, the OCC issued a notice of proposed rulemaking in the Federal Register seeking public comment on a preemption determination regarding state laws pertaining to banks’ ability to determine interest or assess fees on escrow accounts. The proposal focuses on twelve states in particular, including New York (N.Y. Gen. Oblig. Law section 5-601), which requires mortgage investing institutions to pay at least 2 percent annual interest, or a rate set by the state superintendent, on escrow account balances. The OCC determined that New York’s interest-on-escrow law, along with substantively similar laws in eleven other states — California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont, and Wisconsin — should be preempted by the National Bank Act. These state laws generally require the payment of interest on funds held in certain real estate escrow accounts and, in some cases, restrict the assessment of related fees.

The OCC invited comments on all aspects of the proposal, specifically requesting input on whether additional state laws exist with substantively equivalent terms regarding interest-on-escrow or related fee assessments that should also be considered for preemption.

Real Estate Lending Escrow Accounts

On December 23, the OCC also issued a notice of proposed rulemaking in the Federal Register to “codify” the power of national banks and federal savings associations to establish or maintain real estate lending escrow accounts, and to affirm banks’ flexibility to determine the terms and conditions of those accounts. The OCC noted in the proposal that “[c]odifying this longstanding power will reduce uncertainty with regards to bank escrow practices and may thereby incentivize increased bank mortgage lending.”

Specifically, the proposed rule would (i) amend the existing definition of “escrow account,” (ii) explicitly recognize banks’ power to create and manage these accounts, and (iii) affirm that the terms and conditions — including investment of escrowed funds, fees and any compensation or interest paid to customers — are business decisions to be made by each bank in its discretion.

The OCC noted in the proposal that it has consistently maintained that escrow account activities are part of the business of banking, and that RESPA “implicitly recognizes” banks’ flexibility in managing these accounts. While RESPA extensively regulates escrow accounts in residential real estate loans by requiring disclosures, annual statements, timely payments, and caps on collected amounts, it does not govern how escrowed funds are invested or mandate compensation to borrowers.