Lawmakers Hear Bill to Require Interest on Mortgage Escrows; Banks Warn of Cost

Representative Joran Johnson introduced House Bill 1378 to the Industry, Business and Labor Committee, saying the bill would “correct the inequity of homeowners providing interest free money to financial institutions via escrow accounts by requiring the interest earned to be credited to the borrower.”

The bill would apply to escrow accounts — funds held by a lender or servicer to pay property taxes, homeowners insurance and related expenses — and Johnson proposed placing the language in the existing escrow code chapter (47-10.1). He told the committee he would ask Legislative Council to draft the move and offered three preliminary amendments: move the language to the existing escrow chapter, require at least 30 days’ notice for rate adjustments, and cap penalties where the current code already provides a $500 fine.

Why it matters: Supporters said the measure would stop lenders from earning short-term use of customers’ escrow funds without crediting borrowers. Johnson offered an illustrative example on the hearing record: a 30-year, $100,000 mortgage at 7% yields roughly $139,000 in interest paid over the loan; adding typical annual taxes and insurance means lenders hold and use roughly $166 per month from a borrower over a year — interest Johnson said should benefit the borrower over decades.

Banking industry witnesses pushed back. Rick Kleberg, president and chief executive officer of the North Dakota Bankers Association, told the committee, “We’re opposed to the concept and we’re opposed to House Bill 1378,” saying escrow accounts exist to ensure taxes and insurance are paid and that servicers incur administrative costs to manage escrows. Kleberg said many loans are serviced by out‑of‑state entities and noted smaller community banks lack scale to absorb added costs, which he said could ultimately increase borrowing costs statewide.

Alexis Baxley, president of Independent Community Banks in North Dakota, and other industry witnesses repeated concerns about the bill’s mandatory terms and penalties; many of the groups said they supported Representative Johnson’s amendments that would limit the severity of penalties.

The Department of Financial Institutions took a neutral stance if amendments are adopted. Commissioner Lisa Cruz warned the committee that language in the draft empowering the department to “suspend operations” for noncompliance would have severe consequences: “If we suspend operations, customers cannot get access to their deposits. And we’d be closing banks just because they messed up on the escrow,” she said, explaining that the draft penalty language would need revision to avoid forcing a bank closure for an escrow error.

Committee next steps: Johnson said he will have Legislative Council draft the suggested relocation of the language to chapter 47‑10.1 and the committee held the bill for further work. No formal vote was recorded in the hearing.

Context and competing details: Johnson said about 15 states require interest be paid on escrow accounts; he proposed a minimum credit of one‑half of 1% (0.5%). Witnesses noted other states set different approaches — for example, California and New York have set flat requirements in prior measures — and argued that federal rules (FHA, USDA, VA) already require escrow for some loans. Housing Finance Agency staff said agency-held escrow balances are deposited at the state Bank of North Dakota, which currently pays 0.25%, below Johnson’s proposed minimum; that point was offered as an example of how the minimum could affect public or quasi‑public servicers.

What to watch: committee work on Johnson’s amendments, the department’s requested changes to penalty language, and whether the bill’s minimum rate or scope is altered to address concerns from smaller community banks.