Two prominent U.S. banking associations representing state financial and mortgage regulators have sharply urged the Trump administration to rescind a pair of proposals issued in late December, which they say would undermine individual states’ ability to protect homeowners from abusive escrow practices while disadvantaging nonbank and state-bank mortgage servicers.
In a jointly signed letter sent Thursday to the Office of the Comptroller of the Currency (OCC), a primary federal prudential regulator of nationally chartered banks, the Conference of State Bank Supervisors (CSBS) and American Association of Residential Mortgage Regulators (AARMR) said the OCC was trying to regulate around legal precedent while helping national banks pick the pocket of homeowners across the U.S.
The associations warned that the legally dubious proposals would set a dangerous precedent if implemented, encouraging future attacks on state consumer financial protection laws.
“No matter how hard they try, the OCC cannot regulate around Congress and the courts,” said Brandon Milhorn, president and CEO of CSBS. “Taking money out of the pockets of homeowners and giving it to national banks is a callous response to the housing affordability crisis.”
The groups also accuse the OCC of manufacturing conflict between state interest-on-escrow laws and federal banking laws, that if allowed to stand, “would eviscerate any meaningful constraint on the ability of national banks to disregard state consumer financial laws.”
“The only rationale for adopting the proposed rule is to manufacture a conflict that provides a mechanism to preempt the application of state laws that have protected consumers for over half a century,” claimed CSBS and AARMR.
When a homeowner with a mortgage makes their monthly mortgage payment, a portion of their payment funnels into an escrow account managed by the mortgage servicer. The escrow account balance is used to pay property tax and homeowners insurance when bills for each become due, usually paid annually.
Laws in almost one-quarter of U.S. states, which CSBS says account for 30% of annual mortgage volume, discourage banks from inflating escrow account balances as a source of interest-free funding (unlike bank deposits, for example) by requiring entities that hold escrow balances for residences in those states to pay homeowners a small amount of interest.
The two proposals issued by the OCC — “Preemption Determination: State Interest-on-Escrow Laws” and “Real Estate Lending Escrow Accounts” — determine that “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,” says OCC.
OCC has not responded to Scotsman Guide’s request for comment on a range of concerns raised by state regulators and consumer advocates about the proposals.
CSBS and AARMR say the combined effect of the proposals would “deny homeowners interest on funds held in escrow by national banks,” while creating “a competitive disadvantage for state-chartered banks and nonbank mortgage servicers” that would still have to pay interest on escrow balances, applicable to state law, while national banks enjoyed a preemption.
State and federal credit unions would also still have to pay interest, says the National Consumer Law Center (NCLC), opposing the OCC’s moves in a comment letter posted to its website that noted, among myriad criticisms, the market distortions it would create for lenders and consumers.
“It will unfairly advantage national banks and federal savings associations, which will be able to offer interest rates that may appear to be lower than those offered by other mortgage lenders, but have a hidden charge in the form of retention of all the interest earned on the borrower’s escrow account,” wrote NCLC.
“Requiring interest to be paid on escrow accounts also protects consumers by countering the servicer’s desire to hold more money in an escrow account than necessary,” the law center added. “Unless the servicer pays interest on the escrow account, the funds in the account are essentially an involuntary, interest-free loan to the servicer until they are disbursed.”
Servicers conduct escrow analyses annually to assess whether the amount collected monthly to cover taxes and insurance was actually sufficient. Escrow shocks have hit homeowners across the U.S. in recent years, amid an ongoing housing and cost-of-living crisis, as property taxes and homeowners insurance costs have spiked.
The state banking and mortgage regulatory groups also pointed out that consumers do not choose who services their mortgage, which could result in the loss of hundreds or thousands of dollars based on the sole fact that a national bank services one borrower’s mortgage, but not their neighbor’s.
Escrow accounts are mandated for many first-time homebuyers and low- and moderate-income families who cannot make a 20% downpayment.
“Not only is this woefully out-of-step with the Administration’s priorities of supporting Main Street growth and tackling housing affordability,” wrote CSBS and AARMR, “but it is precisely the type of short-sighted federal overreach that led Congress to limit the OCC’s authority to preempt state laws in the first place,” citing the run-up to the 2008 financial crisis.
“These OCC proposals are not only bad law,” added Milhorn, “but they are also horrible policy.”
