Mortgage escrow accounts are a feature of 80 percent of U.S. mortgages. They ensure on-time payment of property taxes and insurance and thereby reduce risk to lenders and help borrowers budget for payments that are large and infrequent. Borrowers typically prepay into their escrow accounts each month as part of their required mortgage payment, and the funds are typically paid out every six months. As a result of this timing difference, escrow accounts can generate interest income. There are varying practices among lenders as to whether to pay mortgage borrowers interest on the funds held in these accounts.
Starting in the 1970s, several states enacted laws requiring lenders to pay interest on escrow balances. These laws were motivated by a view that funds held in escrow were effectively an interest-free loan from borrowers to their lenders, and that borrowers should receive interest. A recent working paper examines whether this regulation generates value for consumers, or whether lenders offset the cost through other pricing mechanisms.
The research finds that laws mandating interest payments on escrow do not benefit consumers on average. Lenders largely offset the cost by increasing upfront origination fees. Moreover, fees increase more for lower-income borrowers, who are financially more vulnerable and traditionally have fewer credit options; borrowers in the highest income quartile experience no statistically significant impact. These laws also reduce the likelihood that a mortgage application results in origination, signaling potential decline in the overall value of mortgage lending.
This post summarizes the research in the context of the broader debate on national bank preemption, a legal doctrine that invalidates state laws that “prevent or significantly interfere with” a federally chartered bank’s exercise of its federally authorized powers. This research illustrates two ways state laws mandating interest on escrow “interfere” with banks’ business under applicable federal law: first, by leading to changes in banks’ fee structures for mortgage lending and, second, by reducing the likelihood an application results in an origination. In this respect, the research supports a recent proposal by the OCC that would preempt these state laws for national banks on the grounds that these laws “deprive [national banks] of the flexibility granted by federal law” and “interfere with national banks’ ability to efficiently and effectively exercise their real estate and related escrow powers.”[1]
Mortgage Escrow Accounts and their Regulation
Mortgage escrow accounts emerged during the Great Depression as a tool for lenders to manage credit risk. Their main purpose was to guarantee that no tax lien was placed on a collateral property and that it was insured against accidental damage or loss. In the absence of such an account, a bank would not know whether a borrower was staying current on tax payments or insurance premiums and thereby degrading the value of the collateral.
Since 1974, mortgage escrow accounts have been governed at the federal level by the Real Estate Settlement Procedures Act (RESPA). This law imposes strict procedural requirements on federally related escrow accounts, including caps on balances, annual account analyses and mandatory disclosures. RESPA does not contain language regulating the pricing of escrow accounts, such as whether lenders are required to pay interest on funds held in them.
In response to concerns about lenders not paying interest to customers on escrow funds, beginning in the 1970s several states enacted laws mandating minimum interest payments on escrow accounts, sometimes at fixed rates and sometimes tied to market benchmarks.[2] Those laws were intended to give borrowers a portion of the returns generated by servicers reinvesting escrow balances.
Until recently, these laws were assumed to have been preempted as to national banks. But beginning in the early 2010s, borrowers have brought lawsuits against national banks arguing that they are not preempted and that banks are subject to the states’ interest-rate requirements for escrow accounts. National banks and amici, including BPI, have argued that escrow account pricing is a core component of bank lending activity and therefore subject to federal banking authority rather than state control.[3]
The Office of the Comptroller of the Currency has recently released two notices of proposed rulemaking on bank escrow activities, making empirical evidence on the effects of these laws particularly relevant. Specifically, the OCC’s proposed rules would codify national banks’ ability to set the terms of their mortgage escrow accounts and confirm that state interest-on-escrow laws interfere with national banking powers. One proposal explains, if faced with state laws imposing set minimum escrow amounts, national banks may “reasonably decide, where practicable, to desist from using escrow accounts, implement fees, otherwise increase borrower costs to offset losses, or reduce their overall mortgage lending due to decreased profitability.”[4]
Design of the Research
The analysis presented in the research paper is based on Home Mortgage Disclosure Act (HMDA) public filings from 2018 through 2024. HMDA filings provide near-universal coverage of mortgage applications and originations in the U.S., including detailed information on loan pricing, origination fees, borrower income, underwriting characteristics and application outcomes.
The data are used in a “treatment and control” framework. In 2022 Iowa repealed its mandate for interest on escrow – the treatment.[5] This makes possible a before-and-after-comparison of outcomes in Iowa to similar states that never enacted interest on escrow laws – the control.[6] An underlying assumption of the analysis is that, but for the repeal of interest on escrow, outcomes in Iowa would have followed a similar path to those in the comparison states. After the repeal, any change to outcomes in Iowa relative to the control states is attributed to the policy.
The primary outcomes studied are mortgage interest rate spreads,[7] origination charges and the probability that an application results in a loan origination. Together, these outcomes capture the main avenues of pricing and effects on origination activity.
How Does Interest-On-Escrow Policy Effect Pricing?
Figure 1 shows the estimated effects of interest-on-escrow laws on mortgage pricing in Iowa during the relevant period. The left panel shows the effect on mortgage rate-spreads. The middle panel shows the effect on origination charges, or fees. As shown in the figure, the paper does not find evidence that lenders adjusted mortgage-rate spreads in response to the policy. Instead, it finds that lenders primarily offset the cost through higher origination charges.[8]
Figure 1: Required Interest-on-Escrow and Mortgage Pricing
Once Iowa repealed its law, a typical lender reduced its origination charges in Iowa by an average of $173 per loan relative to comparison states. A back of the envelope calculation indicates that a lender in Iowa would have expected to pay between $193 and $276 in escrow interest over the life of a typical mortgage, implying a 60 to 90 percent pass-through of this cost back to consumers.[9]
The measured pass-through effects are highly uneven across the borrower income distribution, as shown in the right panel of Figure 1. Borrowers in the lowest income quartile saw origination fees fall by nearly $300 after repeal of the law, while borrowers in the highest income quartile experienced no statistically significant change. This pattern suggests a potentially regressive cross-subsidy. Lower-income borrowers, with fewer credit options, bore a disproportionate share of the regulatory burden; thus, when the interest requirement was lifted, they saw a disproportionate benefit.
Does Interest-On-Escrow Affect Mortgage Originations?
The research also finds that eliminating interest on escrow raised the chances that a mortgage application resulted in origination. This is shown in Figure 2.
Figure 2: Required Interest-on-Escrow and Mortgage Originations
After Iowa repealed its law in early 2022, a higher percentage of mortgage applications were originated – about 3 percent relative to comparison states. This means that when the interest-on-escrow requirement was in place, fewer applications resulted in completed loans, indicating that the policy affected lenders’ decisions to extend credit or consumers’ choices to take out a mortgage from a particular lender. Again, the impact was most pronounced for lower-income applicants. Borrowers in the highest income group experience no statistically significant effect.
While this result makes clear the policy influenced origination decisions in some way, it does not show exactly how they were affected. For example, the law could have caused some borrowers to start applications but, in the end, originate the loan at another lender, or the law could have caused some loans to not be made altogether. The analysis in the paper does not identify the eventual outcome for the borrower. Regardless, even if applicants got a loan elsewhere, the analysis suggests higher costs presented a hurdle to financing.
Evidence of Prevention and Significant Interference
Under the National Bank Act, as reaffirmed in the Supreme Court cases Barnett Bank and Cantero and codified by Congress in the Dodd-Frank Act,[10] state laws that “prevent or significantly interfere with” national banks’ exercise of their national bank powers are preempted.[11] Following the U.S. Supreme Court’s decision in Cantero, courts assessing whether a state law “significantly interferes” with a national bank’s activities must conduct a “nuanced comparative analysis,” comparing the nature and degree of the interference caused by the state law with the interference in prior Supreme Court decisions. This analysis entails a “practical assessment” of the State law, accounting for past precedent, the law’s text and structure and, critically, common sense.
The Cantero decision does not require a quantitative analysis to demonstrate significant interference. Based only on a “practical assessment” and “common sense,” it is clear that state laws dictating rates of interest banks must pay on escrow accounts interfere with the exercise of their federal powers.[12] The standard in Cantero does not require more than that. Nevertheless, this research provides quantitative support showing how banks’ businesses actually changed following recission of a state interest-on-escrow law, corroborating the view that interest-on-escrow laws “could cause banks to increase mortgage prices or even reduce their mortgage lending.”[13] Because these laws “deprive [national banks] of the flexibility granted by federal law” and “interfere with national banks’ ability to efficiently and effectively exercise their real estate and related escrow powers,” they significantly interfere with national banking powers.[14]
As one example, this data shows that dictating an interest rate for bank mortgage escrow accounts can distort how banks structure their mortgage origination charges, just as proponents of NBA preemption have long argued it would. Absent an interest-on-escrow requirement, banks could offset the costs of their mortgage escrow services by reinvesting their escrow funds. This can also benefit borrowers by effectively allowing them to amortize the cost of escrow administration over the life of the mortgage, rather than paying a higher upfront origination fee. However, state interest-on-escrow laws prevent and interfere with banks’ ability to structure the cost of administering escrow accounts in this way and, as shown by this study, lead to higher upfront charges for consumers.
Conclusions
This research illustrates an example of how price regulation in consumer financial markets can produce unintended consequences. When lenders have multiple pricing margins, restricting one margin can lead to cost shifting with ultimately little consumer benefit. In this case, origination fees became the primary adjustment channel. The research also shows that these rules can have distortionary effects on the market by changing lender and consumer participation decisions. This can reduce the quantity of transactions and the value generated from mortgage lending.
The findings of this research are also relevant to the ongoing debates over federal preemption of state banking laws. The evidence suggests that escrow interest mandates change how banks conduct their mortgage business, including how they recover the costs of administering mortgage escrow accounts. This supports the view that state interest-on-escrow laws prevent and interfere with banks’ mortgage activities within the meaning of applicable law. Therefore, such laws should be preempted under the National Bank Act and should not apply to national banks.
[1] Preemption Determination: State Interest-on-Escrow Laws, 90 Fed. Reg. 61,093, 61,097 (proposed Dec. 30, 2025) (to be codified at 12 C.F.R. pt. 34)
[2] Interest on mortgage escrow laws were enacted mostly in the 1970’s and 1980’s, and some states have repealed them since. In all, the following states enacted escrow interest laws: California, Connecticut, Iowa (repealed 2022), Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont, Wisconsin (repealed 2017).
[3] See, e.g., Brief of Bank Policy Institute et al. as amici curiae supporting Flagstar Bank, Kivett v. Flagstar Bank, FSB, Case No. 3:18-CV-05131 (9th Cir. 2025), available at https://bpi.com/bpi-amicus-brief-in-kivett-v-flagstar-bank/; Brief of Bank Policy Institute et al. as amici curiae supporting Bank of America, N.A., Case No. 1:18-cv-4157 (2nd Cir. 2025), available at https://bpi.com/wp-content/uploads/2024/11/Cantero-v.-Bank-of-America-Amicus-Brief-BPI-ABA-Chamber-CBA-2024-10-25-Filed-4879-5566-7443-v1.pdf; Brief of Bank Policy Institute et al. as amici curiae supporting Citizens Bank, NA, Case No. 1:21-cv-00296-MSM (1st Cir. 2024).
[4] Real Estate Lending Escrow Accounts, 90 Fed. Reg. 61,099, 61,103 (proposed Dec. 30, 2025) (to be codified at 12 C.F.R. pts. 34 & 160).
[5] The repeal of interest on escrow formed a small part of a larger bank reform bill signed into law in early 2022. Pages 51-52 of the bill describe the repeal of interest on escrow, where the word “shall” is replaced with “may” and the prescribed interest rate is cross out.
[6] The analysis selects comparison states using the synthetic control method of Abadie, Diamond, and Hainmueller published in the Journal of the American Statistical Association in 2010. A link to their paper is here. In the analysis, the most weight is given to Nebraska and Wisconsin as close comparison states to Iowa.
[7] Mortgage interest rates at origination are universally tied to an underlying benchmark rate, which changes over time. A popular benchmark rate is the average prime offer rate (APOR). The data provide the spread over APOR as a more accurate measure of lender rate setting.
[8] This is consistent with recent work of Benetton, Gavazza, and Surico (American Economic Review, 2025) that argues banks are more likely to adjust fees in response to a cost shock because consumers are less sensitive to them. They also argue not allowing firms to charge and/or adjust fees may not be optimal.
[9] We assume borrower pay into their escrow account monthly and the account is emptied out every six months to pay the tax and insurance bill. The calculation assumes a mortgage takes between seven to 10 years to repay. It also assumes interest rate of 1.25% as an approximation of savings accounts rates in Iowa over the repeal period. Insurance amounts and tax assessments are based on average property values for loans given in Iowa and reported in HMDA. Data on insurance amount and tax assessments are sourced from insurance.com and the American Community Survey, respectively.
[10] See 12 U.S.C. 25b.
[11] Barnett Bank of Marion Cnty. v. Nelson, 517 U.S. 25 (1996); Cantero v. Bank of Am., N.A., 602 U.S. 205 (2024).
[12] For a comprehensive comparative analysis, see BPI amicus briefs in note 2, supra. See also, BPI and Consumer Bankers Association, Letter to OCC regarding Real Estate Lending Escrow Accounts (OCC Docket ID OCC-2025-0736) and Preemption Determination: State Interest-on-Escrow Laws (OCC Docket ID OCC-2025- 0735) (Jan. 29, 2026), https://bpi.com/bpi-and-cba-letter-on-occs-preemption-proposals/.
[13] 90 FR 61094.
[14] Preemption Determination: State Interest-on-Escrow Laws, 90 Fed. Reg. 61,093, 61,097 (proposed Dec. 30, 2025) (to be codified at 12 C.F.R. pt. 34).
