Second Circuit Reaffirms Preemption of New York’s Mortgage Escrow Interest Law, Setting Stage for Potential Supreme Court Rematch with First Circuit

By Alan S. Kaplinsky on May 8, 2026

Posted in Litigation and Court Decisions, OCC, Preemption

In a decision issued May 5, 2026, a Second Circuit Court of Appeals panel in Cantero v. Bank of America, N.A., August Term 2024, Nos. 21-400, 22-403, once again held that New York’s General Obligations Law § 5-601, which requires mortgage lenders to pay at least 2% interest on escrow accounts is preempted by the National Bank Act (NBA) as applied to national banks like Bank of America. This ruling comes on remand from the Supreme Court’s 2024 unanimous decision in Cantero v. Bank of America, N.A., which vacated the Second Circuit’s earlier opinion for failing to apply the proper “nuanced comparative analysis” under Barnett Bank. The Second Circuit had held that the New York law “would exert control over” over a national bank’s power “to create and fund escrow accounts.”

The Second Circuit’s decision starkly conflicts with the First Circuit’s 2025 ruling in Conti v. Citizens Bank, N.A., Case No. 22- 1770 (Sept. 22, 2025) (which held that a similar Rhode Island interest-on-escrow law is not preempted). The Supreme Court recently denied a cert petition on April 20, 2026, Case No. 25-1004. Since the Cantero case reached the Supreme Court once before and the conflict with the First Circuit opinion in Conti and its arguable conflict with the Ninth Circuit’s recent opinion in Kivett discussed below, there is a high likelihood the Supreme Court will grant certiorari for a second time to resolve the ongoing uncertainty. (Plaintiffs may also seek rehearing en banc in the Second Circuit.) In the interim, national banks continue to face tremendous uncertainty regarding the applicability of myriad state consumer protection laws.

On remand from the Supreme Court after Cantero, the Ninth Circuit in Kivett v. Flagstar Bank (in a 2-1 decision issued October 2, 2025) reaffirmed its prior holding that California’s interest-on-escrow law is not preempted. The majority held it remained bound by its earlier precedent (Lusnak v. Bank of America) and declined to conduct a fresh Cantero analysis as required by the Supreme Court. In March of this year, the 9th Circuit surprisingly denied a petition for rehearing en banc. It is likely that Flagstar will file a cert petition in the Supreme Court.

This outcome arguably conflicts with the Second Circuit’s May 2026 decision in Cantero (on remand), which applied the Supreme Court’s “nuanced comparative analysis” and held New York’s similar law is preempted. The Ninth Circuit’s refusal to fully engage with the Supreme Court’s blueprint adds to the growing circuit tension and uncertainty for national banks.

Case History

Plaintiffs Alex Cantero and Saul R. Hymes (and Ilana Harwayne-Gidansky) brought putative class actions alleging that Bank of America (BOA) violated New York law by failing to pay the required 2% interest on mortgage escrow accounts. The district court denied BOA’s motions to dismiss, rejecting preemption. In 2022, a Second Circuit panel reversed, holding the state law preempted because it would “exert control over” a banking power granted by federal law.

The Supreme Court granted certiorari and, in May 2024, vacated and remanded. Justice Kavanaugh’s unanimous opinion clarified that the Dodd-Frank Act codified the Barnett Bank standard: a state consumer financial law is preempted if it “prevents or significantly interferes with the exercise by the national bank of its powers.” Courts must conduct a “practical assessment of the nature and degree of the interference” through a “nuanced comparative analysis” with Supreme Court precedents, rather than applying bright-line rules. The Court left open the potential relevance of OCC views on remand.

On remand, after reargument in March 2025, the Second Circuit panel (Judges Livingston, Park, and Pérez) reaffirmed preemption in a decision authored by Judge Park, with Judge Pérez dissenting.

Majority Opinion: Preemption Under Nuanced Barnett Bank Analysis, Bolstered by Proposed OCC Determination

The majority conducted the required comparative analysis and concluded that the nature and degree of interference by GOL § 5-601 is “more akin” to preempted state laws in Supreme Court precedents than to non-preempted state laws.

The Court reasoned as follows:

The law affects a core national banking power: the power to make real estate loans and exercise incidental powers, including offering and structuring mortgage escrow accounts as a risk-mitigation tool.
It targets banks specifically and limits their broad discretion to set the terms of escrow accounts (including whether and how much interest to pay), akin to the preempted state laws in Fidelity Federal Savings & Loan Ass’n v. de la Cuesta (prohibiting use of due-on-sale clauses in mortgages) and Barnett Bank itself (prohibiting bank from selling insurance).
The degree of interference is significant, comparable to the advertising restriction in Franklin National Bank v. New York (prohibiting the use of the word “savings” to describe deposit accounts) as it imposes ongoing costs that affect the efficiency and profitability of mortgage lending operations.

The majority sharply disagreed with the First Circuit’s Conti decision, criticizing its analysis as insufficiently attentive to the practical burdens on national banks’ lending powers and its divergence from the Supreme Court’s guidance on comparative precedent analysis.

The opinion also relied on a proposed OCC determination (not yet finalized) addressing real estate lending escrow accounts, which supported the view that such state mandates significantly interfere with national banks’ powers. This added weight to the preemption conclusion, consistent with the OCC’s longstanding regulatory position on escrow-related matters.

Dissent: Criticism of Majority and OCC Role

Judge Pérez dissented, arguing that the majority failed to faithfully apply the Supreme Court’s nuanced Cantero framework and gave undue weight to the proposed (unfinalized) OCC determination. The dissent contended that the burden imposed by a modest 2% interest requirement is not severe enough to “significantly interfere” with national banks’ powers, especially when weighed against consumer protection interests and precedents where minor state regulations were allowed.

The dissent criticized the majority for an overly broad view of banking powers and for effectively reviving aspects of the categorical “control” approach of the earlier Second Circuit opinion which the Supreme Court had rejected. It also questioned the propriety of relying on a non-final OCC proposal, noting limits on deference post-Loper Bright and Dodd-Frank’s framework, and suggested the majority’s approach undermines the balance Congress intended between federal banking authority and state consumer protections.

Ongoing Uncertainty for National Banks

This decision does not end the matter. With the First Circuit going the other way in Conti (and the Supreme Court having recently declined review there), the circuit conflict is real and consequential. A petition for rehearing en banc in the Second Circuit is possible, and Supreme Court review remains highly likely given the stakes for the dual banking system.

Before and after the Supreme Court’s Cantero opinion, our firm has counseled numerous national banks on these issues. With the exception of state laws that directly conflict with an express federal power granted to national banks, the conservative approach is to comply with applicable state laws while the legal landscape continues to evolve. The patchwork of decisions creates compliance challenges, potential litigation risk, and operational complexity across jurisdictions. Banks should monitor further developments closely, including any OCC finalization of its preemption determination and appellate next steps (plaintiffs filing a petition for rehearing en banc in the Second Circuit or filing a petition for a writ of certiorari in the U.S. Supreme Court.

This case underscores the enduring tension in national bank preemption doctrine and the practical importance of obtaining clear guidance from the Supreme Court or Congress.

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We have been closely monitoring Cantero and related cases through our blog, webinars and podcast shows and will continue to do so.