Does a federal savings bank have to pay interest on my mortgage escrow account in Maryland?

Plain-English summary

Maryland law has long required lenders to pay interest to borrowers on the money held in escrow accounts for residential first-mortgage loans. The State Bank Commissioner asked the Attorney General in 1990 whether that requirement, CL §12-109, applied to a federal savings bank doing business in Maryland. On its face the statute reached "a bank, savings bank, or savings and loan association doing business in Maryland," which would include a federal savings institution.

The Attorney General concluded that the Maryland requirement could not be applied to federal savings associations, because federal law preempted it. Those institutions are regulated by the federal Office of Thrift Supervision (OTS), successor to the Federal Home Loan Bank Board (FHLBB). The FHLBB once had its own rule requiring federal associations to pay escrow interest where state law required it, but repealed that rule in 1983 and said escrow matters should instead "be governed by the loan contract." Under the Supreme Court's de la Cuesta decision, when the federal thrift regulator deliberately chooses to give its institutions flexibility in structuring their loans, a state law that limits that flexibility is preempted. Maryland's escrow-interest requirement did exactly that: it took away a federal association's ability to decide, by contract, whether to pay escrow interest. The federal regulations also declared themselves the exclusive rules governing federal savings association operations, and mortgage lending practices are part of those operations. So the opinion held CL §12-109 preempted as applied to federal savings associations, which owed escrow interest only where a particular loan contract required it.

Currency note

This opinion was issued in 1990. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The regulatory landscape here has shifted substantially since 1990. The Office of Thrift Supervision was later abolished and its functions moved to other federal regulators, federal thrift preemption rules have been rewritten, and Congress has since passed broad consumer-finance legislation touching mortgage escrow accounts. Maryland's Commercial Law Article has also been amended. Read the analysis and the citations here as the law as it stood in 1990, and check current federal and State law before relying on any specific rule about escrow interest.

Common questions

Did a federal savings bank have to pay interest on a Maryland mortgage escrow account?
No, under this 1990 opinion, unless its loan contract required it. The Attorney General concluded that CL §12-109, Maryland's escrow-interest requirement, was preempted by federal law as applied to federal savings associations regulated by the OTS.

Why was the Maryland law preempted when there was no federal rule requiring escrow interest?
Because the absence was deliberate. When the FHLBB repealed its escrow-interest rule in 1983, it said escrow matters should be left to the loan contract. A state law forcing escrow interest interfered with that intended flexibility, and federal regulations claimed exclusive authority over federal savings association operations.

Did this apply to state-chartered banks too?
No. The opinion addressed federal savings associations regulated by the OTS. The preemption rested on the exclusive federal regulation of those federal institutions, not on state-chartered banks.

Could a federal savings association still end up paying escrow interest?
Yes, if it agreed to. The opinion noted that an association could be bound by the terms of a particular loan contract to keep paying interest on escrow, since the federal scheme left such matters to the contract.

Background and statutory framework

CL §12-109(b) required a lending institution that makes or takes assignment of a residential first-mortgage loan and holds an escrow account to pay the borrower interest on the escrow funds, and CL §12-109(a)(2) defined "lending institution" to include a bank, savings bank, or savings and loan association doing business in Maryland. Read alone, that reached federal savings institutions. But federal savings institutions are regulated by the OTS, part of the federal thrift apparatus created by FIRREA in 1989. The OTS's predecessor, the FHLBB, had once required federal associations to pay escrow interest where state law required state institutions to do so; a court held that rule "explicitly exclusive" and preemptive of added state requirements (First Federal Savings and Loan Association of Boston v. Greenwald, a First Circuit decision). Effective May 26, 1983, the FHLBB repealed that rule, and afterward no OTS regulation addressed escrow interest.

The preemption analysis followed the Supreme Court's decision in de la Cuesta, which held that federal regulations have no less preemptive effect than federal statutes when within the agency's authority, and that the FHLBB had broad, plenary rulemaking power under the Home Owners' Loan Act (12 U.S.C. §1464(a)). Because Congress had not completely displaced state regulation, the question was whether Maryland's law conflicted with federal law. There was no direct impossibility, since the OTS did not forbid paying escrow interest, but a state law still conflicts if it obstructs the full purposes of the federal scheme. The FHLBB's 1983 preamble said it was removing the escrow provisions so that such matters could "be governed by the loan contract," backed by disclosure and the federal RESPA statute. Under de la Cuesta, where the federal regulator "conspicuously has chosen" to give institutions flexibility in the economic terms of their loans, a state law limiting that flexibility is preempted. Maryland's escrow-interest mandate limited exactly that flexibility. The federal regulations also declared, at 12 C.F.R. §545.2, that Part 545 was the exclusive set of rules for federal savings association operations, and the Supreme Court had recognized that a thrift's mortgage lending practices are a crucial part of its "operation." Given the FHLBB's stated intent to preempt state operational rules and its specific purpose in deleting the escrow-interest requirement, the opinion concluded CL §12-109(b) was preempted as applied to federal savings associations, consistent with the position federal regulators and at least one other state attorney general had taken. The one exception: an association could still be contractually bound to pay escrow interest.

Citations and references

Statutes and regulations:

• §12-109 of the Commercial Law Article, Maryland's escrow-interest requirement, including CL §12-109(b) and the "lending institution" definition in CL §12-109(a)(2)
• The Home Owners' Loan Act, 12 U.S.C. §1464(a), the FHLBB's broad rulemaking authority; the former escrow rule at 12 C.F.R. §545.6-11(c) (1975); and 12 C.F.R. §545.2, declaring Part 545 the exclusive rules for federal savings association operations
• FIRREA (Pub. L. No. 101-73, 103 Stat. 183), creating the OTS, and the Real Estate Settlement Procedures Act, 12 U.S.C. §§2601-2617

Cases:

• Fidelity Savings and Loan Association v. de la Cuesta, 458 U.S. 141, 153-54 (1982), the Supreme Court's federal thrift preemption decision
• First Federal Savings and Loan Association of Boston v. Greenwald, 591 F.2d 417 (1st Cir. 1979), holding the earlier FHLBB escrow rule preemptive
• Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963), on impossibility preemption

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1990/Volume75_1990.pdf (this opinion appears at printed pages 218-222 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

FINANCIAL INSTITUTIONS

Federal Savings Associations — Escrow Accounts — Preemption — Maryland Statute Requiring Interest on Escrow Accounts is Preempted By Federal Regulation

May 29, 1990

Ms. Margie H. Muller
Bank Commissioner

 You have requested our opinion on whether a federal savings bank doing business in Maryland is required by §12-109 of the Commercial Law Article ("CL" Article) to pay interest on escrow accounts established in connection with residential first mortgage loans.

 For the reasons set forth below, we conclude that CL §12-109 may not be applied to institutions regulated by the federal Office of Thrift Supervision, because the Maryland requirement has been preempted by federal law. A federal savings association must pay interest on mortgage escrow accounts only if it is contractually obligated to do so.

I

Background

  Maryland law requires that "[a]fter May 31, 1974, a lending institution which lends money secured by a first mortgage or first deed of trust on any interest in residential real property and creates or is the assignee of an escrow account in connection with that loan shall pay interest to the borrower on the funds in the escrow account ...." CL §12-109(b). "Lending institution" is defined as "a bank, savings bank, or savings and loan association doing business in Maryland." CL §12-109(a)(2). This statute, on its face, requires that a federal savings institution doing business in this State pay interest on first mortgage escrow accounts.

The inquiry, however, does not end with Maryland's statute. Federal savings institutions are also subject to regulation by the federal Office of Thrift Supervision ("OTS").1

 The predecessor of the OTS, the Federal Home Loan Bank Board ("FHLBB"), at one time required federal associations to pay interest on escrow accounts if state law required state savings and loan associations to do so.2 That regulation was held to be "explicitly exclusive" and therefore preemptive of a state statute that imposed additional requirements. First Federal Savings and Loan Association of Boston v. Greenwald, 591 F.2d 417 (1st Cir. 1979).

Effective May 26, 1983, the regulation was repealed. Currently, no OTS regulation addresses the payment of interest on escrow accounts.

II

Federal Preemption

 Under the Supremacy Clause of the United States Constitution, Article VI, clause 2, "[F]ederal regulations have no less pre-emptive effect than federal statutes," if a regulation is within the agency's statutory authority and is not arbitrary. Fidelity Savings and Loan Association v. de la Cuesta, 458 U.S. 141, 153-54 (1982). In Fidelity, the Supreme Court reasoned that if the FHLBB had unambiguously intended to preempt conflicting state law and Congress had authorized the preemption, a state law that conflicted with the FHLBB regulation was preempted.

 Fidelity conclusively established the authority of the FHLBB to issue preemptive regulations. The Court found that Congress' broad delegation of authority in §5(a) of the Home Owners' Loan Act of 1933 gave the FHLBB plenary authority to issue regulations.3 Further, Congress intended for the FHLBB to "establish and regulate 'a uniform system of [savings and loan] institutions,'" based on the FHLBB's determinations of the "best practices" of local thrifts. 458 U.S. at 166.

 Because Congress has "not completely displaced state regulation" of federal savings institutions, 458 U.S. at 153, the key question is whether CL §12-109 conflicts with federal law. On the surface, Maryland's law and the absence of a federal regulation on the subject of interest on escrow do not conflict. Maryland law requires the payment of interest on escrow accounts; the OTS does not prohibit such payments. So it is not impossible for a federal association to comply with both the federal law and the State law. Cf. Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963). The State law nevertheless may be viewed as conflicting if it creates an obstacle to the accomplishment of the full purposes and objectives of the federal law. Fidelity, 458 U.S. at 156.

 The FHLBB expressed its reasons for deleting the interest on escrow provisions in the preamble to the entire set of "operations" regulations adopted in May 1983: "The Board has decided to remove the substantive provisions pertaining to escrow accounts, allowing such matters to be governed by the loan contract, and in their place require a more detailed disclosure about the accounts. In light of this disclosure and the provisions of RESPA [Real Estate Settlement Procedures Act of 1974, 12 U.S.C. §§2601-2617], the Board believes that the existing provisions on escrow accounts are no longer necessary and for that reason has deleted them." 48 Fed. Reg. 23032, 23039 (May 23, 1983).

 In Fidelity, the Supreme Court stated that if the FHLBB "conspicuously has chosen" to allow its regulated institutions flexibility in arranging the economic elements of their loan transactions, a state law limiting that flexibility is preempted. 458 U.S. at 155. The preamble to the removal of the interest on escrow provision conspicuously stated the FHLBB's intent that anything concerning escrow accounts "be governed by the loan contract." Maryland's statute requiring interest on escrow interferes with the flexibility that the FHLBB intended to create by not allowing a federal association to decide whether to make interest on escrow part of a loan contract.

  Further, the federal regulations are plainly intended to preempt state laws requiring the payment of interest on escrow accounts. The OTS has stated that the regulations in 12 C.F.R. Part 545, "Operations", are to be the only restrictions on the operations of federal associations: "The regulations in this Part 545 are promulgated pursuant to the plenary and exclusive authority of the Office to regulate all aspects of the operations of Federal savings associations, as set forth in section 5(a) of the Act. This exercise of the Office's authority is preemptive of any state law purporting to address the subject of the operations of a Federal savings association." 12 C.F.R. §545.2.

 The FHLBB thought that interest on escrow provisions concerned "operations," for its prior provisions requiring interest were found in Part 545. Nor is there any basis for concluding otherwise. As the Supreme Court observed, "a savings and loan's mortgage lending practices are a crucial aspect of its 'operation' over which the Board unquestionably has jurisdiction." Fidelity, 458 U.S. at 167.

 Given the FHLBB's overall intent to preempt state laws on operational matters and its specific purpose in deleting the prior interest on escrow requirement, both of which were stated explicitly at the time that the changes were adopted, we are compelled to conclude that CL §12-109(b), Maryland's interest on escrow requirement, is preempted. Moreover, our opinion is consistent with that of the federal regulators, who since 1983 have taken the position that any state law requiring the payment of interest on mortgage escrow accounts was preempted. See, e.g., Opinion of the FHLBB Office of the General Counsel (September 14, 1983); Opinion of the FHLBB Office of the General Counsel (August 13, 1985). The Attorney General of Nebraska has reached a similar conclusion. Attorney General's Opinion No. 61 (1975).

III

Conclusion

 In summary, it is our opinion that CL §12-109(b) may not be applied to federal savings associations because it has been preempted by federal regulation. The State may not require a federal savings association to pay interest on escrow accounts established in connection with first mortgage loans. However, an association may be bound by the terms of particular contracts to continue paying interest on such loans.

                                          J. Joseph Curran, Jr.
                                          Attorney General

                                          Dorothy Mara
                                          Staff Attorney

                                          Jack Schwartz
                                          Chief Counsel
                                            Opinions & Advice

1
The Office of Thrift Supervision is part of the new federal regulatory apparatus for thrift institutions. See Title III of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 ("FIRREA").

2
That regulation, 12 C.F.R. §545.6-11(c) (1975), provided as follows:

              A Federal association which makes a loan on or after June 16, 1975 on the security of a single-family dwelling occupied or to be occupied by the borrower ... shall pay interest on any escrow account maintained in connection with such a loan (1) if there is in effect a specific statutory provision or provisions of the State in which such dwelling is located by or under which State-chartered savings and loan associations, mutual savings banks and similar institutions are required to pay interest on such escrow accounts, and (2) at not less than the rate being required to be paid by such State-chartered institutions but not to exceed the rate being paid by the Federal association in its regular accounts .... Except as provided by contract, a Federal association shall have no obligation to pay interest on escrow accounts apart from the duties imposed by this paragraph.

3
The pertinent statute, 12 U.S.C. §1464(a), provided that the FHLBB was "authorized, under such rules and regulations as it may prescribe, to provide for the organization, incorporation, examination, operation, and regulation of associations ... and to issue charters therefor, giving primary consideration to the best practices of local mutual thrift and home-financing institutions in the United States." Although somewhat reworded by FIRREA, the substance of current 12 U.S.C. §1464(a) is identical, vesting in the Director of OTS the same broad grant of rulemaking authority.