Maryland Homeowners Could Lose Their Escrow Interest Under New Federal Rules

• August 17th

by UrbanTurf Staff

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Maryland is one of roughly 14 states that requires mortgage lenders to pay interest on escrow accounts — the funds collected monthly to cover property taxes and homeowners insurance — and that consumer protection is now under threat from new federal banking rules.

In May, the Office of the Comptroller of the Currency finalized a pair of regulations giving banks and federal savings associations discretion over whether to pay interest on those balances at all, regardless of state law. The rules took effect June 18, and Maryland is among the states where the change could be felt most directly, since roughly 80% of mortgage holders nationally carry an escrow account.

Maryland's law is more generous than some of its peers. Lenders here are required to pay annual interest on escrow balances at a rate tied to the yield on one-year U.S. Treasuries — currently just shy of 4 percent, compared to the roughly 0.63% average on a traditional savings account. On a typical escrow balance, that gap is real money: a 0.63% rate on $5,000 nets a homeowner about $31.50 a year, while 4% on the same balance works out to around $200. For Maryland homeowners with national bank mortgages, that's the kind of annual credit — sometimes reported on a 1099-INT — that could simply disappear if their lender opts out under the new OCC rules. 

Maryland isn't taking it quietly. The state is one of ten that sued the OCC last week, arguing the agency exceeded the authority Congress gave it and is attempting to sidestep restrictions imposed by the Dodd-Frank Act. The suit also raises a competitive-fairness argument: smaller, state-chartered banks would remain bound by Maryland's escrow-interest law while national banks would not, potentially pushing business toward the institutions no longer required to pay out. Maryland's AG had flagged concerns with the rule as far back as January, joining a multistate comment letter opposing the OCC's proposal before it was finalized.

For now, Maryland homeowners with escrow accounts at national banks are in a holding pattern — the rule is in effect, but the lawsuit could still unwind it. Worth watching: whether individual lenders move quickly to stop paying interest now that they have federal cover to do so, or hold off while the litigation plays out. 

This article originally published at https://dc.urbanturf.com/articles/blog/maryland_homeowners_could_lose_their_escrow_interest_under_new_federal_rule/24903.