For homeowners in New York with mortgages, their monthly payments typically include not only principal and interest but also funds deposited into an escrow account used for future property taxes and home insurance. This money is temporarily held by the lending institution before being used to pay bills. And a law in New York state that has been in effect for over 50 years requires lending institutions to pay interest on these funds.
On August 11th, the New York State Attorney General announced that New York, along with nine other states, filed a lawsuit against the Office of the Comptroller of the Currency (OCC), seeking to halt the implementation of a new federal rule to maintain the protection of interest on escrow accounts for mortgages in states like New York.
Simply put, if your mortgage includes an escrow account, the lending institution collects a portion of the estimated property taxes and insurance premiums each month and deposits it into the escrow account. When the property taxes or insurance premiums are due, they are paid from this account.
Since this money cannot be freely used by homeowners for a significant period of time, New York state has required mortgage lenders to pay at least 2% interest on escrowed funds since 1974. For example, if a homeowner has an average of $10,000 in their escrow account, at the minimum 2% interest rate, they would earn around $200 in interest per year. The actual amount depends on the account balance, deposit period, and applicable regulations.
The background of this requirement dates back to the last century. The New York State Attorney General’s office stated that in the early days, mortgage lenders required borrowers to prepay property taxes and insurance premiums, essentially using these funds interest-free. Since the 1970s, some states, including New York, have enacted laws requiring lending institutions to pay interest on escrowed funds.
Currently, a significant proportion of mortgages in the United States have escrow accounts. Data cited by the New York State Attorney General’s office shows that as of 2016, approximately 80% of mortgages in the U.S. were linked to escrow accounts.
On May 15th, the OCC issued two final rules aimed at preventing the application of interest on escrow accounts laws in New York and thirteen other states and territories to national banks and federal savings institutions. If these rules are implemented, the interest on escrow accounts for some New York homeowners may be affected.
The AG’s office believes that the new federal rules exceed the OCC’s statutory authority and could weaken long-standing consumer protection measures implemented by state governments. Hence, they filed a lawsuit together with California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, and Vermont.
The core of the law upheld by the New York State Attorney General’s office aims to prevent homeowners from being required to keep large sums of money in lending institutions for an extended period without any return.
For the average homeowner, this lawsuit does not mean an immediate loss of interest on the escrow account or an immediate change in mortgage terms. The goal of the lawsuit is to prevent the implementation of the new federal rule, and the final outcome is subject to court ruling.
Homeowners can check their mortgage statements or inquire with their loan servicers to confirm if they have an escrow account, the current balance in the account, and whether they are receiving interest on funds held in escrow. For homeowners who need to pay thousands or even tens of thousands of dollars in property taxes and insurance annually, the funds in the escrow account are not insignificant, making any changes in related interest regulations worth noting.