A coalition of Democratic state attorneys general is taking the Trump administration to court over new federal rules that would nullify state laws requiring mortgage lenders to pay interest on homeowners' escrow accounts. The lawsuit, filed Tuesday in federal court in Oregon on behalf of ten states, argues the rules are an "unlawful handout" to large financial institutions.
The legal challenge targets two rules issued by the Office of the Comptroller of the Currency (OCC) in May, which assert that federal law preempts interest-on-escrow statutes in more than a dozen states and two U.S. territories. The attorneys general contend the OCC overstepped its authority and violated procedural safeguards Congress put in place after the 2008 financial crisis, as well as Supreme Court precedent.
"Time and again, we've seen the Trump Administration hand out favors to insiders and corporate special interests at the expense of Oregonians," said Oregon Attorney General Dan Rayfield. "This is a case in point: the Administration wants to let big banks pad their profits with money that, by law, belongs to Oregon families."
Mortgage lenders typically require homeowners to deposit money into escrow accounts to cover property taxes and insurance premiums. Because these deposits often exceed what is immediately needed, lenders can hold substantial sums for weeks, allowing them to earn returns on funds that technically belong to borrowers. Several states have enacted laws requiring lenders to pay a minimum interest rate on these balances to discourage over-collection.
"The purpose of each of these state interest-on-escrow laws is entirely consistent with [the Real Estate Settlement Procedures Act], which is to protect consumers and prevent abuses by mortgage lenders, including national banks, by ensuring a disincentive to requiring consumers to pay more than needed into escrow accounts," the attorneys general wrote in the complaint.
The OCC, however, maintains that national banks have long had the flexibility to set escrow terms, including whether to pay interest or charge fees. In announcing the rules, the agency said its actions "emphasize federal preemption as a critical tool for reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth." The Hill has reached out to the OCC for comment on the lawsuit.
This is not the first time courts have weighed in on the issue. In a unanimous 2024 decision, the Supreme Court ruled that the Second Circuit applied the wrong legal standard when it upheld federal preemption of New York's 2 percent interest-on-escrow law. The case was remanded, and in May the Second Circuit again sided with the banks, holding that the National Bank Act overrides state law.
New York is among the plaintiffs in the new lawsuit. "At a time when homeownership is more expensive than ever, the Trump administration is trying to make it even more costly with these unlawful rules," said New York Attorney General Letitia James. "Big banks and mortgage lenders should not be able to force homeowners to lock away significant amounts of money without paying interest. For decades, New York has prevented lenders from taking advantage of homeowners, and my office is taking action to defend our laws."
The legal battle comes amid broader administration moves that critics say favor corporate interests over consumer protections. The case also highlights ongoing clashes between the administration and state officials over federal preemption and states' rights.
