OCC Proposes Federal Preemption to Clarify Escrow Account Rules for Banks

TLDR: 

• OCC codifies bank authority to manage escrow accounts and related fees.
• Federal preemption proposed over state interest-on-escrow laws in 12 states.
• Proposal allows banks discretion in paying interest or assessing escrow fees.
• Public comment period open to inform final federal escrow regulations.

OCC Federal preemption is the focus of a new regulatory initiative addressing how national banks manage real estate escrow accounts. 

The Office of the Comptroller of the Currency has opened a public comment period on proposals tied to interest payments and fees on escrowed funds. The agency framed its approach around regulatory clarity and consistency. 

The proposals center on federal authority over escrow practices and the treatment of conflicting state-level requirements affecting lending operations.

Clarifying Federal Authority Over Escrow Practices

OCC Federal preemption is advanced through a proposal to codify long-established real estate lending powers. 

The OCC stated that national banks and federal savings associations have long held authority to create and manage escrow accounts. This authority includes discretion over account structure, compensation decisions, and related fees.

In announcing the proposal, the OCC said, “Federal preemption is a critical tool for reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth.” 

The agency linked this view directly to escrow account flexibility. It noted that codifying these powers would formalize existing practices rather than introduce new ones.

The OCC added that clearer federal rules could reduce uncertainty for lenders. The agency explained that uncertainty around escrow obligations may discourage lending activity. 

By setting consistent standards, the OCC said banks could apply business judgment without conflicting interpretations across jurisdictions.

Addressing State Interest-on-Escrow Requirements

OCC Federal preemption is also reflected in a proposed determination involving state interest-on-escrow laws. 

The OCC explained that some state statutes remove flexibility from federally chartered institutions. These laws require interest payments or restrict fee structures tied to escrow accounts.

The OCC stated that federal law preempts a New York statute requiring interest payments on escrowed funds. 

The agency noted that 11 other states have laws with substantively equivalent terms. According to the proposal, these laws are similarly preempted under federal banking statutes.

OCC noted that the proposal would “provide clarity and reduce uncertainty with regards to bank escrow practices.” 

The agency linked this clarity to stable lending operations. It also stated that escrow decisions should remain part of federally regulated business judgment.

The OCC emphasized that the proposal does not mandate interest payments or fees. Instead, it preserves the ability of national banks to decide “whether and to what extent” compensation or fees apply. 

Public comments will inform the final regulatory outcome, with the OCC maintaining focus on consistency, clarity, and established federal authority.

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