States Fight Back Against OCC's New Escrow Interest Rules
On August 11, 2026, ten states filed suit against the Office of the Comptroller of the Currency (OCC), challenging two rules the agency adopted this spring that attempt to wipe out state escrow interest requirements for national banks. The states, including New York, California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island and Vermont, argue the OCC overstepped its authority under Dodd-Frank and ignored the framework the Supreme Court laid out in Cantero v. Bank of America. For mortgage industry participants who have been watching the preemption fight unfold since Cantero and the First Circuit decision in Conti v. Citizens Bank, NA, this lawsuit raises the stakes considerably.
The Two Rules Under Attack
The lawsuit challenges a pair of related rules that were issued by the OCC on May 15, 2026 and became effective June 18. Together they were designed to work as a unit.
The Escrow Powers Rule declares that national banks have full discretion to decide whether, and how much, interest or compensation to pay on escrow funds.
The Preemption Rule then uses that new authority as the basis for finding that New York’s escrow interest law, along with thirteen other state laws it calls comparable, conflicts with federal law and is therefore preempted.
The States’ Core Arguments
The complaint raises several distinct grounds for challenging the rules under the Administrative Procedure Act (APA), organized into two counts. The first count argues that the OCC exceeded its statutory authority and acted contrary to law, and the second argues that the rules are arbitrary and capricious. Both counts point to the same underlying conduct. The states contend that the agency built the Escrow Powers Rule “solely as a pretext to manufacture a conflict” between that rule and state interest-on-escrow laws, then used that manufactured conflict as the entire basis for the Preemption Rule’s finding that fourteen state statutes must give way to federal law.
In the states’ view, the OCC could not point to any actual interference between state escrow laws and national bank operations, so it created a new bank power out of whole cloth and then treated the mere existence of that power as sufficient conflict to justify preemption on its own. That two-step approach, according to the complaint, sidesteps the case-by-case analysis that Dodd-Frank requires and revives the kind of sweeping preemption theory the Supreme Court rejected in Cantero.
The complaint spells out five specific defects in the OCC’s reasoning:
The OCC lacks the authority to create a brand new national bank power for the sole purpose of preempting state statutes, something Dodd-Frank never authorized.
The agency misapplied the Barnett Bank standard, the Supreme Court’s 1996 preemption test that Congress generally codified in Dodd-Frank, by asking only whether a state law limits a bank’s flexibility, rather than whether it prevents or significantly interferes with a bank power.
The approach amounts to the categorical, all-or-nothing test the Supreme Court rejected in Cantero, since it would treat every escrow interest statute as preempted regardless of how much it actually affects bank operations.
The OCC skipped Dodd-Frank’s procedural requirements by analyzing only New York’s statute in detail and then lumping thirteen other states together as “substantively equivalent” without walking through their actual terms.
The rules were issued without evidence in the record, despite Dodd-Frank’s requirement that any preemption determination be backed by substantial evidence developed on the record of the rulemaking, with the agency instead asserting that preemption is purely a legal question that needs no factual support.
Why This Matters for the Mortgage Industry
Regardless of how the case comes out, the filing puts national banks and their servicing operations back in a period of uncertainty on an issue many had hoped was heading toward resolution. Lenders and servicers should take heed.
Lenders that adjusted escrow interest practices in reliance on the OCC’s rules should assess those decisions given the pending challenge.
Servicers operating across the ten plaintiff states, plus the other states covered by the Preemption Rule, should track this case closely to ensure a court order does not complicate their approach to possible state law obligations.
Compliance teams should keep escrow systems flexible.
Legal and compliance staff should watch for a request for preliminary injunctive relief, since a pause on the rules could arrive before a final ruling on the merits.
Looking Ahead
This lawsuit puts the OCC’s newest preemption strategy squarely in front of a federal court, and the outcome will shape whether national banks can rely on the agency’s escrow rules or whether they remain bound by the decades old patchwork of state interest requirements. Industry participants should treat the current rules as unsettled rather than final, and should plan for the possibility that state escrow interest obligations come back into play.
Questions about how this case impacts your business? Contact troy@garrishorn.com.