The U.S. Supreme Court recently granted certiorari to hear the Second Circuit case of Cantero et al. v. Bank of America, N.A., involving National Bank Act (NBA) preemption of New York’s law requiring that interest be paid to consumers on mortgage escrow account funds. The decision would address a split between the Second and Ninth Circuits on the topic of NBA preemption of state “interest-on-escrow” laws.
In Cantero, the Second Circuit, reversing the district court, agreed with Bank of America 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.) In doing so, 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 the 2022 decision in Flagstar Bank, FSB v. Kivett, the Ninth Circuit ruled that the 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).) In doing so, the Ninth Circuit indicated that it was bound by precedent from another panel of the Ninth Circuit in the 2018 case of Lusnak v. Bank of America, N.A. The preemption standard applied by the panel in Lusnak 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.” We note that in 2019 the Supreme Court denied a petition to hear the Lusnak case.
As we previously noted in March of this year, the Supreme Court invited a brief from the Solicitor General on the topic, while considering the petition for certiorari. Solicitor General Prelogar’s amicus brief argued against granting cert because neither Circuit’s preemption analysis was correct. Solicitor General Prelogar took the position that the “significantly interferes with” standard for preemption found in 12 U.S.C. 25b requires a practical, case-by-base inquiry, which neither Circuit conducted. The brief stated that “a court must make a practical assessment of the degree to which the state law will impede the exercise of those powers”. Because of the flawed analysis, the brief argued that both Cantero and Flagstar are flawed vehicles for the Supreme Court’s resolution of the issue.
Also of note, in June 2021, the Office of the Comptroller of the Currency filed an amicus brief in support of Bank of America’s position in the Second Circuit case. Arguing for the Second Circuit to overturn the district court in Cantero, the OCC asserted that the lower court erred in applying the “significant interference” preemption standard from Barnett Bank of Marion Cty., N.A. v. Nelson, by requiring that a state law must “practically abrogate or nullify” a national bank power in order to be preempted, and that the lower court also erred in not granting any level of deference to the OCC’s regulations on the issue. Further the OCC stated that the lower court’s decision “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the National Bank Act”.
This case has broader implications for the future of NBA preemption, beyond the specific issue of state “interest-on-escrow” laws. This is the first time that the Supreme Court will have the opportunity to determine what changes, if any, were made to NBA preemption by virtue of the enactment on July 21, 2010 of Section 1044 of the Dodd-Frank Act (12 U.S.C. 25b) and the OCC regulations promulgated thereunder. Section 1044 of Dodd-Frank provides, in relevant part, that the NBA preempts state law only to the extent that the law has a discriminatory effect on national banks, or applying the standard from Barnett, the state law prevents or significantly interferes with the exercise by the national bank of its powers. Shortly thereafter, the OCC promulgated regulations which purported to implement Section 1044 of Dodd-Frank. They provide, in relevant part, that a national bank may make real estate loans, without regard to state law limitations concerning, among other things, “Escrow accounts, impound accounts, and similar accounts”. 12 CFR § 34.4(a). Further, the regulations provide that national banks are subject to certain specified types of state laws, and any other law that that the OCC determines to be applicable to national banks, in accordance with Barnett. 12 CFR § 34.4(b). In Cantero, the Supreme Court will need to determine what test to apply in determining whether the NBA preempts state law and the extent to which the Dodd-Frank Act changes the test that existed prior to the enactment of Section 1044 of Dodd-Frank. The Supreme Court may also determine whether the relevant OCC regulations conform with Section 1044 of Dodd-Frank, and the extent, if any, that the Court may defer to such regulations in light of the fact that the Supreme Court is poised to overrule the Chevron Deference Doctrine.