Democrats Oppose Trump Admin Proposal to Deny Homeowners Thousands of Dollars in Interest Earnings

WASHINGTON, DC - In an effort to save consumers thousands of dollars and prevent the Trump Administration from providing a giveaway to big banks at homeowners' expense, U.S. Senator Jack Reed (D-RI) today led a letter to the head of the Office of the Comptroller of the Currency (OCC) urging the withdraw of recently proposed rules that could preempt state laws requiring banks to pay consumers interest on balances in mortgage-related escrow accounts, as well as the complementary proposed rule allowing national banks to "exercise flexibility in making business judgment as to the terms and conditions of such accounts.

Mortgage lenders often require home owners to make payments into escrow accounts to cover property taxes and insurance premiums. Some states, including Rhode Island, require mortgage lenders to pay interest on those accounts so consumers are fairly compensated. The OCC regulates Federally chartered banks and their subsidiaries.

The letter was signed by 14 other U.S. Senators, including: Angela D. Alsobrooks (D-MD), Elizabeth Warren (D-MA), Ruben Gallego (D-AZ), Richard Blumenthal (D-CT), Chris Van Hollen (D-MD), John Fetterman (D-PA), Sheldon Whitehouse (D-RI), Catherine Cortez Masto (D-NV), Ron Wyden (D-OR), Angus S. King, Jr. (I-ME), Tina Smith (D-MN), Cory A. Booker (D-NJ), Andy Kim (D-NJ), and Amy Klobuchar (D-MN).

The OCC has proposed to preempt laws in over a dozen states requiring banks to pay consumers interest on funds that they hold in mortgage escrow accounts. These escrow accounts are used to collect and pay property taxes and insurance. Many lenders actually require homeowners to set up these accounts as a condition of getting a mortgage. Around 80 percent of homeowners have these accounts. Under the OCC's proposal, Federally-chartered national banks would no longer need to comply with these state laws requiring banks to pay interest to homeowners.

The Trump Administration's proposal is bad for affordability. Over the life of a 30-year mortgage, letting lenders do this would cost the average family thousands of dollars in lost interest payments. It would also mark a federal intrusion into state affairs on an intensely local issue-mortgage lending-in a way that would strip consumers of key protections.

"If the proposal is finalized, national banks will no longer need to pay interest on an account balance that mortgage borrowers are required by law to maintain with the bank. That means consumers will lose out on interest payments to which they are entitled under state law. They will be denied these modest payments at a time when the insurance costs that make up a major component of escrow payments are at an all-time high. The beneficiaries will be the Nation's biggest banks, whose already record profits due to high interest rates will be padded even more at the expense of their customers. They will essentially receive an entitlement to interest-free loans from their customers," the 15 U.S. Senators wrote.

"While the OCC asserts that its proposal will replace a patchwork system with a uniform approach, the proposal would actually create disparate protections for mortgage borrowers depending on the charter of the institution servicing their mortgage. Whether a homeowner will receive interest on their escrow balance would depend on whether their loan is being serviced by a national bank, a state-chartered bank, or a nonbank financial institution. Because mortgage servicing rights are frequently sold by the original lender, a borrower has no control over which institution services their mortgage. A family could move to a state that requires payment of interest on escrow but cannot shop for a different servicer," the letter continued.

If the Trump Administration regulation is finalized by the OCC, it would preempt states' laws and have a significantly negative impact on residents in California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin.

Twenty-three state Attorneys General have submitted comments opposing the OCC's proposal, including: New York, Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, North Carolina, Oklahoma, Oregon, Rhode Island, Vermont, Virginia, and Washington.

Full text of the letter follows:

Dear Comptroller Gould:

We write to request that the Office of the Comptroller of the Currency withdraw the recently proposed rule to preempt state laws requiring banks to pay consumers interest on balances in mortgage-related escrow accounts, as well as the complementary proposed rule allowing national banks to "exercise flexibility in making business judgment as to the terms and conditions of such accounts."

Homeowners with a mortgage generally maintain funds in an escrow account with their servicer to pay property taxes and insurance. Roughly 80% of mortgage holders have these escrow accounts, and the vast majority of first-time homebuyers are required to maintain them as a condition of their mortgage. For 50 years, several states have required both state-chartered and national banks to pay interest on these accounts to prevent banks from using escrow funds as a source of interest-free funding.

If the proposal is finalized, national banks will no longer need to pay interest on an account balance that mortgage borrowers are required by law to maintain with the bank. That means consumers will lose out on interest payments to which they are entitled under state law. They will be denied these modest payments at a time when the insurance costs that make up a major component of escrow payments are at an all-time high. The beneficiaries will be the Nation's biggest banks, whose already record profits due to high interest rates will be padded even more at the expense of their customers. They will essentially receive an entitlement to interest-free loans from their customers.

While the OCC asserts that its proposal will replace a patchwork system with a uniform approach, the proposal would actually create disparate protections for mortgage borrowers depending on the charter of the institution servicing their mortgage. Whether a homeowner will receive interest on their escrow balance would depend on whether their loan is being serviced by a national bank, a state-chartered bank, or a nonbank financial institution. Because mortgage servicing rights are frequently sold by the original lender, a borrower has no control over which institution services their mortgage. A family could move to a state that requires payment of interest on escrow but cannot shop for a different servicer.

The proposal does not meet the high standard for preemption that Congress has established. Under the law, the OCC's proposal must demonstrate, based on "substantial evidence," that paying interest on escrow accounts-a practice that national banks have engaged in for decades under state law-actually "prevents or significantly interferes" with the exercise of their national bank powers. The proposal provides no empirical evidence showing that standard has been met and instead relies on theoretical assertions that do not satisfy the strong evidentiary standard required by Congress.

Multiple courts have examined this exact question and held that state interest-on-escrow laws are not preempted by the National Bank Act. Nevertheless, the OCC is attempting via rulemaking to reshape the standard for national bank preemption that has been established by Congress and upheld by Federal courts. Rather than explain how the proposal can possibly stand up in court given these rulings, the OCC asserts without explanation that "there remains substantial uncertainty" about whether federal law preempts these state laws. Instead of grappling with inconsistent cases and statutes, the OCC ignores them in an attempt to provide banks under its supervision with relief that they could not obtain in court. Despite the OCC's attempts to "provide much needed clarity," the proposal will have the opposite effect. Current law is clear. National banks must comply with state interest-on-escrow laws.

By proposing a nebulous power for national banks to "exercise flexibility in making business judgment as to the terms and conditions of [escrow] accounts," the OCC has manufactured a conflict with state law where none previously existed. If allowed to stand, this creates a roadmap for the OCC to void any state consumer financial law by writing a vague rule that banks have "flexibility" in that area. By overriding state legislatures without a direct statutory conflict, the OCC is undermining the dual banking system and prohibiting the states from protecting consumers from abusive practices.

Real estate lending is an intensely local and community-based activity. In recognition of this fact, the OCC and the states have shared authority over national bank activities in this area. The OCC has never "occupied the field" of national banks' real estate lending and the National Bank Act prohibits the OCC from doing so. This is precisely the wrong time for the OCC to further encroach on consumer-friendly state laws in a way that takes money out of homeowners' pockets because many American families are struggling to make ends meet.

For these reasons, we urge the OCC to withdraw the proposal and to allow families with mortgages to continue receiving the interest payments to which they have been entitled under state law for the past 50 years.

Sincerely,

• Print
• Email
• Share
• Tweet