The U.S. Supreme Court has invited the Solicitor General to file briefs expressing the views of the United States in two cases involving the question whether state laws requiring the payment of interest on mortgage escrow accounts are preempted for national banks and federal savings associations. The Supreme Court is considering whether to grant the petitions for certiorari filed in the two cases. There is currently a split in the circuits on the question.
One case is Flagstar Bank, FSB v. Kivett in which a Ninth Circuit panel, affirming the district court, ruled that the National Bank Act (NBA) does not preempt a California law that requires financial institutions to pay interest at a specified rate on escrow accounts associated with certain mortgage loans. (Cal. Civil Code Section 2954.8(a).) The panel concluded that the California law was not preempted because it did not “prevent or significantly interfere with the exercise of a national bank’s powers.” (Pursuant to Dodd-Frank, the NBA preemption standard also applies to federal savings associations.)
In concluding that the California law was not preempted, the Ninth Circuit panel indicated that it was bound by the prior decision of another Ninth Circuit panel in Lusak v. Bank of America, N.A. The preemption standard applied by the panel in Lusak was whether the California law “prevents [the bank] from exercising its national bank powers or significantly interferes with [the bank’s] ability to do so.” A petition for certiorari filed by Bank of America in Lusak was denied.
The second case is Cantero v. Bank of America, N.A. in which a Second Circuit panel, reversing the district court, ruled that the NBA preempts a New York law that requires “mortgage investing institutions” that maintain escrow accounts to pay interest at a specified rate. (N.Y. Gen. Oblig. Law Section 5-601.) Applying what it called “ordinary legal principles of preemption,” the Second Circuit panel indicated that “[i]t is only when state laws control the exercise of powers granted to national banks that those laws conflict with the NBA.” It concluded that the New York law was preempted because “[b]y requiring a bank to pay its customers in order to exercise a banking power granted by the federal government [i.e. the power to create and fund escrow accounts], the law would exert control over banks’ exercise of that power.”
In its brief filed in the Supreme Court in Cantero, Bank of America observes that the Supreme Court “often considers a 1-1 split like this one too shallow to warrant certiorari.” It also suggests that should the Supreme Court nevertheless decide that the preemption question warrants immediate review, the Court should grant the petition in Flagstar and hold the petition in Cantero. The bank argues that Flagstar is a better vehicle because it presents the preemption issue more broadly than the issue decided by the Second Circuit. In Flagstar, the Ninth Circuit panel, following Lusak, held that state law was not preempted as to all mortgage escrow accounts, regardless of whether they qualified as accounts mandated by Dodd-Frank. In contrast, the Second Circuit panel held only that federal law preempted New York law for mortgage escrow accounts that are not mandatory under Dodd-Frank and expressly reserved the question of whether state law would be preempted for mandatory accounts.