States sue over mortgage escrow interest

A coalition of 10 Democratic-led states, including Oregon, sued the Trump administration Tuesday over a new rule that could cost homeowners hundreds or even thousands of dollars by preempting state laws that require mortgage lenders to pay interest on the money borrowers deposit into escrow accounts to cover taxes and insurance.

Mortgage lenders generally require borrowers to make monthly payments into savings accounts, called escrow accounts, to cover the cost of annual property taxes and home insurance premiums. Because homeowners pay monthly but taxes are due once a year, those escrow accounts generate interest for the lender.

At least 12 states since the 1970s enacted laws requiring mortgage lenders to pay homeowners interest for the money they have in their escrow accounts to prevent predatory lending practices. The Oregon Department of Justice estimated the state's law results in the state's mortgage holders receiving an average of $200-$300 per year in interest payments.

However, the Office of the Comptroller of the Currency, a federal agency that supervises and examines banks, issued two new rules in May to prevent those state laws from applying to national banks and federal savings associations, thus slashing the interest many homeowners receive for the money in their escrow accounts.

The rule does not apply to state-chartered banks, which plaintiffs say leaves smaller banks at a competitive disadvantage.

Oregon Attorney General Dan Rayfield and New York Attorney General Letitia James are leading the lawsuit alleging the federal agency is violating the limits Congress placed on it when it passed the Dodd-Frank Act, a massive consumer protection law passed in the wake of the 2008 financial crisis aimed at curbing risky financial industry practices.

"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," James 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."

The coalition also includes the attorneys general of California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Rhode Island and Vermont — all of whom represent states with interest-on-escrow laws.

In Rhode Island, Attorney General Peter Neronha said the law results in borrowers recouping thousands of dollars each year.

"In the midst of a national affordability crisis, those who have scraped together the money to buy their own home and stay in it can't afford to lose money they are entitled to under state law," he said in a statement. "These state consumer protection laws have been in place for decades to ensure that Rhode Island borrowers receive every penny they are due, and the administration's attempt to pull a fast one on consumers is uncalled for and unlawful."

The states filed their suit in U.S. District Court in Portland and are seeking a court order declaring the rules illegal and preventing their implementation.

The case marks Oregon's 74th lawsuit against the Trump administration, Rayfield told reporters in a virtual press conference Tuesday afternoon.

Interest-on-escrow laws vary per state

Under Oregon law, lenders must pay homeowners 2.6% in monthly interest on the money held in their escrow accounts — a rate calculated using the floating interest rate of U.S. Treasury bills minus 1%.

Each state has a different set-up, with some mandating a 2% flat rate and others requiring lenders to pay out the rate they offer on a typical savings account, according to Oregon Department of Justice spokesperson Jenny Hansson.

There are 703,000 mortgage holders in Oregon, and the interest they receive varies depending on where they live and the value of their property.

"Because we barely look at that statement that comes in the mail every month, frankly, I think the Trump administration thought they could get away with this because most of us probably wouldn't notice," Rayfield said.

The lawsuit is a simple way to keep money in citizens' pockets, Rayfield said.