OCC Proposals Confirm Federal Preemption of State Interest-On-Escrow Laws

In a significant move for national banks and federal savings associations, the Office of the Comptroller of the Currency (OCC) has proposed a new regulation (Proposed Rule)¹ and a declaratory determination (Proposed Determination)² (together, the Proposals) that would confirm that those federally chartered institutions are not bound by the interest-on-escrow laws currently imposed by 12 states. Specifically, if adopted, the Proposals would reaffirm that federal banking law prevails over these state laws and that, as such, national banks and federal savings associations have significant discretion regarding the use of escrow accounts in real estate lending. More broadly, the dual Proposals underscore one of the key advantages of the federal banking charter — uniform national requirements — and confirm that the OCC is prepared to defend national bank preemption.

Comments on the Proposals are due by January 29, 2026.

Background

Under the Supremacy Clause of the U.S. Constitution, federal law is the supreme law of the land and any state law that contradicts federal law is preempted. In Cantero v. Bank of America (2024), the Supreme Court affirmed that in the context of banking, as articulated in the Court’s Barnett Bank of Marion County, NA v. Nelson decision,³ a state law directly conflicts with a federal law when the state law prevents or significantly interferes with a national bank’s exercise of its federal powers. In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress reaffirmed that standard and expressly authorized the OCC to issue preemption determinations regarding which types of “State consumer financial laws” are preempted for national banks and federal savings associations under the Barnett Bank standard.⁴

Over the past decade, New York and other states enacted laws requiring banks located in the state, purportedly including national banks and federal savings associations, to pay interest on consumer mortgage funds held in escrow. These laws arguably interfere significantly with the existing real estate lending powers of national banks and savings associations under the National Bank Act and the Home Owners’ Loan Act (HOLA), and the question of whether those federally chartered institutions must comply with state interest-on-escrow laws has been widely litigated.⁵

The Proposals

The OCC’s Proposals, if adopted, would put to rest the disputes over the application of these state laws to national banks and federal savings associations. Consistent with the OCC’s longstanding interpretation of the National Bank Act and the HOLA, the Proposals are grounded on the premise that Congress granted national banks and federal savings associations broad power to “establish or maintain real estate lending escrow accounts and to exercise flexibility in making business judgment as to the terms and conditions of such accounts, including whether and to what extent to offer any compensation or to assess any fees related thereto.”⁶ Accordingly, as articulated in the Proposed Determination, “federal law preempts state laws that eliminate OCC-regulated banks’ flexibility to decide whether and to what extent to (1) pay interest or other compensation on funds placed in real estate escrow accounts; or (2) assess fees in connection with such accounts.”⁷ Notably, the OCC appears to have taken the position that the Proposals are clarifications of the breadth of these Congressionally granted powers, and therefore, even if they are not adopted, the state interest-on-escrow laws would still be preempted.⁸

Outlook

The OCC is inviting comment on the Proposals and, in particular, on whether there are state laws other than the 12 it has identified that similarly are subject to preemption under the Barnett Bank standard. In recent years, there have been efforts by states to curtail national bank preemption,⁹ and the comments filed by interested parties will provide the OCC with input to consider when determining whether to adopt final versions of either or both Proposals. As indicated by Comptroller Gould during several industry speeches, this development is suggestive of a return to the OCC’s more aggressive and proactive defense of federal preemption from the early 2000s and should be welcomed by both state and nationally chartered institutions.¹⁰

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If you are considering filing comments on one or both of the Proposals or would like more information about them and the preemption principles they reflect, please contact the authors of this Advisory or your usual Arnold & Porter contact. The firm’s Financial Services team would be pleased to assist you in these matters.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.