Our bank, we are a federal OCC bank, purchases mortgage loans from state chartered banks in Iowa and Wisconsin. We service the loans and the customers know up front they will probably come to us.

Federal law would say we do not need to pay interest on escrows, these two states have laws that say we do.

Do we need to pay the interest or not?

IMO this is a legal question your bank council should be answering. Lots of legal issues effect the outcome of this one.

While I am not sure if the OCC has specifically issued an opinion, the OTS has on this subject (see below). Also, 12 CFR 34.4(a)(6) would appear to provide you the same premption authority as the OTS has at 12 CFR 560.2(b)(6) since they are written almost identically.

Preemption of New York Escrow Account Laws.

OTS Chief Counsel Letter P-2003-7, dated October 6, 2003, preempts New York provisions that require payment of interest on mortgage escrow accounts. In addition to section 5 of the Home Owners’ Loan Act that provides that OTS occupies the field of lending regulation for federal savings associations, OTS’s regulation at 12 C.F.R. §560.2(b)(6) specifically preempts state laws that impose requirements on escrow accounts.

Thank you folks for your help. This is a tricky one.

What sort of facts would you say would affect the outcome?

I don't think there are any facts that effect the outcome and I don't think that it is a tricky situation. While I am not an attorney, I think the facts speak pretty plainly for themseleves that the OCC preemption gives you the right to ignore all state laws that govern escrow accounts. If you want confirmation, write the OCC and ask for a legal opinion.