The OCC Preempted Escrow Interest Laws in 14 States. Ten AGs Just Sued to Stop It. Here's What National Banks Need to Do Now.

TL;DR

• In May 2026, the OCC issued two rules asserting that national banks have authority to decide whether to pay interest on mortgage escrow accounts, and that state laws requiring such payments in 14 states and territories are preempted by federal law.
• On August 11, 2026, ten state attorneys general filed suit in U.S. District Court for Oregon to vacate both rules, arguing the OCC exceeded its Dodd-Frank preemption authority by manufacturing a federal “power” specifically to eliminate state consumer protections.
• As of September 2026, no court has enjoined the OCC rules — meaning national banks currently have legal cover to stop paying escrow interest in affected states, but face the risk that a ruling for the states reinstates that obligation retroactively.
• Practical steps now: get a state-by-state legal analysis, document your compliance decision with explicit rationale, and build a litigation monitoring cadence into your compliance calendar.

The OCC has spent most of 2026 reorienting bank supervision toward material financial risk and away from process-and-documentation enforcement. The escrow preemption rules are a different kind of play: a structural assertion that national banks simply don’t have to follow certain state consumer protection requirements, period.

Ten state attorneys general disagree. And the lawsuit they filed on August 11 is a serious challenge — not performative litigation, but a carefully argued statutory attack on whether the OCC followed the playbook Congress required when Dodd-Frank reshaped federal preemption doctrine.

For national banks with mortgage operations in any of the affected states, this creates a genuine compliance dilemma: the OCC says state law is preempted, the states say the OCC exceeded its authority, and the courts haven’t ruled. Here’s what’s actually at stake.

What the Two OCC Rules Actually Do

On May 19, 2026, the OCC published two rules in the Federal Register that, taken together, amount to a federal declaration that national banks are not required to pay interest on mortgage escrow accounts regardless of what state law says.

The Escrow Powers Rule (published at Federal Register 2026-10037) establishes that national banks have inherent authority to determine the terms and conditions of mortgage escrow accounts — including whether to pay interest on the funds held there. This sounds narrow, but the legal significance is that it creates a documented federal “power.”

The Preemption Determination — OCC Bulletin 2026-21, News Release NR-OCC-2026-37 — then uses that first rule as its predicate: because national banks now have an affirmative federal power over escrow terms, state laws that restrict that power conflict with federal law and are therefore preempted under the National Bank Act. The OCC concluded that laws in 14 states and territories requiring banks to pay interest on escrow accounts fall into this category.

The practical effect for national banks: if you operate in New York, California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Vermont, or several other jurisdictions, you currently have OCC authority to stop paying escrow interest on mortgage accounts — something many of these banks have been doing for years because state law required it.

The States’ Core Legal Argument

Ten state AGs — led by Oregon, with New York, California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Rhode Island, and Vermont — filed suit in the U.S. District Court for the District of Oregon on August 11.

Their central argument is what they call the “twin-regulation approach”: the OCC built a federal rule establishing broad bank discretion over escrow accounts, then used that newly manufactured federal power as the basis for concluding state laws conflict with it. Under this framing, the OCC didn’t find a preexisting conflict between national bank powers and state law — it created the conflict, then eliminated the state law based on the conflict it created.

This matters because Dodd-Frank Act Section 1044 imposes procedural and substantive requirements on OCC preemption determinations that didn’t exist before 2010. The OCC must make a case-by-case determination that a state law “prevents or significantly interferes” with a national bank’s exercise of its powers. The states argue the OCC can’t satisfy that standard by first inventing a power, because the manufactured-conflict analysis is circular.

The states also argue the OCC failed to comply with Dodd-Frank’s requirement that preemption determinations be made through notice-and-comment rulemaking with specific standards, not two-step rule sequencing designed to reach a predetermined outcome.

The Cantero Complication

This lawsuit doesn’t exist in a vacuum. Cantero v. Bank of America has been working its way through the federal courts for years, turning on the same core question: whether New York’s Escrow Law (requiring banks to pay 2% interest on certain mortgage escrow accounts) applies to nationally chartered banks.

The Supreme Court addressed Cantero in 2024, vacating a Second Circuit ruling that had applied the wrong preemption standard. The Court told the Second Circuit to redo the analysis using the Dodd-Frank “significant interference” framework — which requires actual textual or contextual evidence that a state law prevents or significantly interferes with a national bank power, not just any interference.

On remand, the Second Circuit (Cantero II) is doing exactly that analysis — with the OCC’s May 2026 preemption rules now on the table as agency action the court must consider. The ABA Banking Journal flagged in September 2026 that the combination of the circuit split and the OCC’s new preemption determination makes Supreme Court review likely regardless of how the AG lawsuit proceeds in Oregon.

For compliance practitioners: these two cases are on intersecting tracks. A Second Circuit ruling adverse to preemption would limit the OCC’s Cantero position. A district court ruling for the AGs in Oregon would call the OCC rules themselves into question. Either outcome affects your mortgage servicing operations.

Where This Leaves National Banks Right Now

No court has issued a preliminary injunction against the OCC rules. That means, as of today, the OCC’s preemption determination is legally in effect. National banks operating in the 14 affected jurisdictions have OCC cover to stop paying escrow interest if they choose.

That doesn’t mean the decision is simple.

Option 1: Continue paying escrow interest. The safest state-law posture. If the AG litigation succeeds and the OCC rules are vacated, you never had a gap. Cost: you continue an obligation the OCC says you didn’t have to meet.

Option 2: Stop paying escrow interest in affected states. Legally defensible under the current OCC rules. Risk: if courts rule for the states, you may face retroactive liability for interest that wasn’t paid, and you’ll have to rapidly reconstruct systems that were paying it. Propmodo estimated the escrow interest at stake across the 14 jurisdictions could reach billions annually in aggregate — though that figure includes all national banks, not any single institution.

Option 3: Reduce payments but maintain minimum compliance reserves. Some institutions may try to thread the needle — technically operating within OCC authority while preserving the ability to resume full payment if the litigation forces it.

What every national bank with mortgage operations should do immediately, regardless of which option they choose:

1. Conduct a state-by-state legal analysis covering which of the 14 affected jurisdictions you operate in, what your current escrow interest practices are, and what the legal risk looks like in each state pending the litigation.

2. Document your compliance decision. Whatever you decide — continue, stop, or modify — write it down with explicit legal rationale, approved at the right level of governance. If an examiner or court asks later, you want contemporaneous documentation of why you made the call you made.

3. Build litigation monitoring into your compliance calendar. A motion for a preliminary injunction, a district court ruling, or a Second Circuit decision in Cantero II could change your legal position materially within weeks. Assign someone to track this.

4. Review your mortgage servicing contracts and escrow agreements. If you service loans originated under state consumer protection frameworks that incorporated interest-on-escrow requirements, the contract terms matter independently of whether state law is preempted.

What This Case Is Really About

The escrow interest dispute is, in dollar terms, relatively modest for most individual institutions. But the legal principle at stake is significant: whether the OCC can systematically eliminate state consumer financial protections by first establishing broad federal bank powers and then preempting state law based on those self-created powers.

If the AGs prevail, it limits the scope of federal preemption in ways that extend well beyond escrow accounts — to any area where the OCC might try to assert broad bank discretion to override state consumer protection requirements. If the OCC prevails, it potentially opens the door to similar two-step preemption determinations in other areas of state consumer protection law where banks prefer a national standard.

This is why ten states sued over mortgage escrow interest. It’s not really about the interest.

So What?

The OCC’s rules are in effect and no court has stopped them. You have legal cover to adjust your escrow practices in affected states — but the litigation risk of retroactive liability if courts rule for the states is real and is worth pricing carefully.

Get your legal team doing the state-by-state analysis now. Document whatever decision you make. And build a monitoring program so you’re not reacting to a court ruling you didn’t know was coming.

The compliance teams that handle this well won’t be the ones who guessed right about who wins in court. They’ll be the ones who documented their reasoning, understood their exposure, and had a response plan ready.

The DOJ’s unsuccessful attempt to exit a redlining consent order two years early is a reminder that federal courts can, and do, override regulators’ preferred compliance outcomes. That applies on the other end of the spectrum too: federal agency wins aren’t permanent.

For context on what happened when the OCC and FDIC last tried to redefine their enforcement standards — and how those changes affect what gets an MRA vs. a supervisory observation — see the OCC/FDIC unsafe or unsound practice rule that went into effect this year. And for the broader pattern of federal enforcement retreating while state regulators fill the gap, the CFPB disparate impact rollback analysis is the clearest recent example.

Sources:

• Ten State Attorneys General File Suit Challenging Two OCC Rules — National Law Review
• OCC Issues Two Final Rules on Preemption of State Interest-on-Escrow Laws — OCC News Release NR-OCC-2026-37
• State Coalition Seeks to Block OCC Preemption of Interest-on-Escrow Laws — ABA Banking Journal
• Ten States Take on the OCC Over National Bank Preemption of State Escrow-Interest Laws — Consumer Finance Monitor
• Federal Register: Preemption Determination: State Interest-on-Escrow Laws