OCC Codifies Bank Authority on Real Estate Escrow Accounts

The OCC issued two final rules that (i) codify national banks' authority to decide whether to establish and how to maintain real estate lending escrow accounts, and (ii) preempt 14 state and territorial laws requiring interest on those balances.

On escrow authorities, the OCC amended 12 CFR Part 34 ("Real Estate Lending and Appraisals") and 12 CFR Part 160 ("Lending and Investment") to confirm that national banks and federal savings associations may establish or maintain real estate lending escrow accounts. The amendments establish banks' discretion in determining whether and to what extent they may pay interest or other compensation on escrowed funds, the fees assessed for escrow accounts, and the investment of escrowed funds. The OCC said the rules codify "longstanding recognized powers" rooted in the National Bank Act, the Federal Reserve Act, and the Home Owners' Loan Act.

On preemption, the OCC added 12 CFR 34.7 ("OCC Preemption Determinations") to declare that federal law preempts state laws restricting OCC-regulated banks' flexibility on escrow interest, compensation, or fees. The rule identifies 14 preempted laws in California, Connecticut, Guam, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, the U.S. Virgin Islands, Utah, Vermont, and Wisconsin. The OCC said it applied case-by-case conflict-preemption analysis under 12 U.S.C. 25b ("State law preemption standards for national banks and subsidiaries"). 

In a press release, the OCC noted a recent Second Circuit determination that federal law preempts a New York law that required interest on mortgage escrow accounts.