Connecticut has joined a coalition of states suing over federal rules that protect national banks from state laws dictating how interest generated by mortgage escrow accounts is used. The lawsuit, filed in Oregon on Tuesday, challenged a pair of rules issued in May by the Office of the Comptroll er of the Currency, an independent bureau within the U.S. Treasury Department. The OCC is tasked with regulating and supervising national banks, federal savings associations and federal branches and agencies of foreign banks. The lawsuit argued that the new rules incorrectly preempt states’ powers to regulate how the interest generated by mortgage escrow accounts is handled. Currently, each state has the power to determine its own rules, with many states opting to return a portion of the interest generated back to homeowners. Under the OCC’s changes however, national banks are only subject to federal rules, potentially allowing them to keep the interest from these accounts, even if they operate in a state with a law that requires borrowers receive a portion of the interest. That’s something the plaintiffs want to change. In a statement released on Tuesday, Connecticut Attorney General William Tong said the rules “would strip states of their authority to require national banks to pay interest on homeowners’ mortgage escrow accounts.” “Homeownership is out of reach for too many families already and the last thing they need is another rule that helps big banks profit off their hard-earned money. This new rule will put banks first, families last, and strip states of yet another tool put in place to help consumers,” he said.  New federal rules are creating issues for states The federal rules in question were first proposed last year and were finalized in May. They revolve around state “interest-on-escrow” laws, state laws explaining how banks are allowed to manage interest accrued on the accounts that hold funds for property taxes and homeowners insurance. Because mortgage lenders often require these accounts to hold far more money than a single upcoming payment, these escrow accounts often carry large positive balances. Banks then collect interest on these balances, earning money from the accounts. States however, have stepped in to regulate what banks do with that interest, with several states requiring that a portion of the interest generated from mortgage escrow accounts be returned to the homeowner paying into the account. In Connecticut for example, a mortgage lender is required to pay interest to a borrower at an adjustable rate. According to the lawsuit, this rate cannot be less “than the average of the national rates for savings deposits and money market deposits for the prior year”. Other states set a specific percentage of interest that must be returned to borrowers. In California, the percentage is 2%. In Minnesota it’s 3%. Some states rely on a formula to determine exactly how much money gets returned to borrowers.  But no matter the amount returned, states have held that their specific rules apply to banks lending within their borders.  The OCC rules change this, with the agency making two arguments to support the shift.  The first is what the agency has called its “escrow powers rule,” which argues that national banks have the power to set their own terms on escrow accounts. The OCC has said that preserving this power is necessary so that banks have “the flexibility to make the business decisions that adapt to local circumstances and other relevant considerations.”  The second rule is the “preemption rule”. This rule finds that because national banks — which are regulated by the federal government — have the power to set their terms, only the federal government can weigh in on those terms. Because of this, the federal government has the power to preempt state regulations that would impact a national bank, specifically calling out its right to preempt regulations in New York on the grounds that the state’s requirements “restrict[s] a national bank’s . . . flexibility to decide whether and to what extent to pay interest or other compensation on funds placed in escrow accounts.”  The rule then added that this preemption also applies to a dozen other states and two U.S. territories, with the OCC saying the regulations are similar to the regulations used in New York. Connecticut was one of the states listed in this rule.  The agency hasn’t clearly explained how it determined that the other state regulations are similar. The OCC did not respond to a request for comment before publication.  Debates over federal preemption are fueling tension between states and the federal government That lack of explanation is one key issue raised in the lawsuit, with the attorneys general arguing that the OCC is required to challenge each state regulation individually and cannot lump a group of states together and preempt all of them at once.  In doing so, the plaintiffs argued, the OCC is acting beyond the powers given to the agency.  “Congress has not delegated such boundless authority to the OCC,” the attorneys general wrote in the lawsuit. “To the contrary, Congress placed strict substantive and procedural limits on the OCC’s ability to make preemption determinations.”  The suit noted that several U.S. Supreme Court decisions, as well as the Dodd-Frank regulations approved by Congress after the 2008 financial crisis, all support states’ ability to pass regulation.  The challenge comes as the Trump administration and state governments continue to disagree over preemption, with the federal government arguing that it has the power to overrule a number of state laws while states argue the opposite.  On this issue, legal rulings have been mixed. A previous challenge to New York’s interest-on-escrow law was pushed to the Supreme Court, but was later sent back down to the U.S. Court of Appeals for the Second Circuit.  In May, the Second Circuit ruled that New York’s law was preempted by federal regulations, specifically the National Bank Act. The court found that the New York law “affects a broad federal grant of power to set the terms of mortgage-escrow accounts and it impedes national banks’ ability to offer those accounts efficiently.”  New York homeowners are currently asking the Supreme Court to take another look at the issue.  In the meantime, the OCC has argued that the new rules are vital to “reducing unnecessary burden, enabling local and national prosperity, and unleashing economic growth,” according to a press release from earlier in the year.  The plaintiffs, including Tong, see the issue differently, arguing that “Congress has not delegated to the OCC freestanding power to issue regulations for the purpose of preempting state laws.”  The states of California, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, and Vermont have joined Connecticut in the lawsuit.  ...read more read less