Ten state attorneys general are challenging federal banking rules that could allow some national banks and federal savings associations to decide whether homeowners receive interest on money held in mortgage escrow accounts.

The lawsuit was filed Tuesday, Aug. 11, in the U.S. District Court for the District of Oregon against the Office of the Comptroller of the Currency and Comptroller Jonathan Gould. The states argue that the OCC exceeded its authority by allowing federally regulated banks to bypass state requirements on escrow interest, CNBC reported Thursday.

Mortgage escrow accounts hold money collected from homeowners for expenses such as property taxes and homeowners insurance. Lenders generally collect these amounts with monthly mortgage payments and later use the funds to pay the bills on the homeowner's behalf.

About 80% of mortgage holders have an escrow account, according to Lereta, a company that provides real estate tax and flood data to mortgage servicers.

Homeowners typically make escrow payments monthly, while property taxes and insurance premiums are generally paid annually or semiannually. That can leave significant amounts sitting in escrow for extended periods, according to the report.

OCC Rules

The OCC issued the two rules in May, and they became effective June 18. One rule allows national banks and federal savings associations to determine escrow-account terms, including whether to pay interest or charge fees. The other says federal law preempts state laws governing those terms for OCC-regulated banks.

"The rules basically allow OCC-regulated banks not to pay interest on mortgage escrow accounts," Solomon Maman, a Chicago attorney specializing in financial services law, told CNBC.

Fourteen states and U.S. territories have laws requiring interest to be paid on escrow balances, according to the lawsuit. The requirements vary by state. Rhode Island requires escrow accounts to earn the same interest rate as a regular savings account, while Maryland requires annual interest based on the yield of one-year U.S. Treasuries.

The OCC did not immediately respond to Benzinga's request for comment.

Rising Escrow Costs

Escrow balances have also been rising. They increased 45% nationally over five years, while about 65% of escrow accounts were short in 2026, potentially increasing monthly mortgage payments by as much as $175, according to Cotality data.

State Challenge

The states argue that the OCC exceeded its authority by limiting state protections for borrowers.

"Both Congress and the courts have repeatedly acted to preserve states' central role in protecting consumers," the lawsuit said, according to the report.

The amount of interest homeowners receive depends on the state and how the average escrow balance and applicable interest rate are calculated. Depending on the lender and state, interest may be credited to the escrow account or paid directly to the homeowner.

For illustration, a 0.63% annual rate on a $5,000 balance would generate $31.50 in interest, while a 4% rate would generate $200. The average rate on traditional savings accounts is 0.63%, according to Bankrate, while a one-year Treasury yield is just below 4%.

Banks' Response

State-chartered banks are not directly affected by the OCC rules. However, some states have "wild card" provisions that could allow those banks to follow federal banking rules in certain circumstances.

Whether banks will immediately change their escrow practices remains uncertain.

"There are some conflicting court decisions" in different federal courts, Maman said, meaning banks' responses could depend on where they operate.

"Does that mean a national bank that has been doing it would immediately change it? They may or may not," he said.