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A group of Democratic state attorneys general is suing the Trump administration to block its attempt to invalidate state requirements that mortgage lenders pay homeowners interest on money deposited into escrow accounts, calling it an “unlawful handout” to big banks.
The lawsuit, filed Tuesday in a federal court in Oregon on behalf of 10 blue states, challenges two agency rules issued by the Office of the Comptroller of the Currency (OCC) in May stating federal law preempts interest-on-escrow laws in more than a dozen states and two U.S. territories.
The attorneys general argue that the rules exceed the OCC’s rulemaking authority and violate other procedural safeguards enacted by Congress 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 (D). “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.”
Banks and other mortgage lenders generally require homeowners to make monthly payments into escrow accounts to cover property taxes and insurance premiums.
Because those deposits are typically larger than what is immediately needed, lenders can end up holding large sums of money for weeks at a time, which critics argue allows them to quietly profit from money that doesn’t belong to them.
Some states have enacted laws requiring lenders to pay borrowers “minimum amounts of interest” in a bid to level the playing field.
“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.
But the OCC contends that banks have long had the authority to “exercise flexibility” in setting the terms and conditions of escrow accounts, including whether to compensate customers with interest or charge fees.
“The OCC’s actions emphasize federal preemption as a critical tool for reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth,” the agency said in a news release announcing the new rules.
The Hill has reached out to the agency for comment on the new lawsuit.
Federal courts have weighed in on this matter before.
The Supreme Court held in a unanimous 2024 decision that the U.S. Court of Appeals for the Second Circuit applied the wrong legal test when it found that federal law preempted New York’s minimum 2 percent interest-on-escrow law.
The high court sent the case back to the Second Circuit to determine whether the New York law “prevents or significantly interferes” with a national bank’s power. The lower court subsequently ruled again in May that the National Bank Act overrides state law.
New York is a plaintiff in the new litigation.
“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,” Attorney General Letitia James (D) said in a statement. “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.”
Add as preferred source on Google Tags Dan Rayfield Democratic state attorneys general Letitia James Oregon Trump administrationCopyright 2026 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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