National Bank Act
Cantero v. Bank of America, N.A.
Date: Oct. 13, 2023
Issue: Whether the National Bank Act (NBA) preempts the application of state escrow-interest laws to national banks.
Case Summary: The U.S. Supreme Court agreed to examine whether the NBA preempts escrow interest laws to national banks.
In 1996, the U.S. Supreme Court laid the framework of NBA preemption in Barnett Bank of Marion Country, N.A. v. Nelson. In Barnett Bank, the Court ruled a state law is preempted by the NBA if it “prevents or significantly interferes with the exercise by the national bank of its powers.” In support, the Court cited precedent stating a state law is preempted if it hampers a federal law, interferes with the purposes of a federal law, or stands as an obstacle to Congress’s objectives. Barnett Bank was the last case in which the Court addressed NBA preemption.
Alex Cantero, Saul Hymes and Illana Harwayne-Gidansky (collectively plaintiffs) filed putative class actions, alleging Bank of America (BofA) violated New York’s interest on mortgage escrow (IOE) law by not paying interest on their accounts. The mortgage agreement provided that BofA is “not required to pay . . . any interest on escrow funds unless . . . applicable law requires otherwise.” BofA moved to dismiss, arguing the NBA preempts New York’s IOE law because it significantly interferes with its federal lending power. The district court disagreed and refused to dismiss the case. On appeal, ABA and a group of trades (collectively ABA), filed an amicus brief supporting BofA. The brief explained mortgage state laws fixing the terms of mortgage escrow accounts constitute “significant interference” with a national bank’s lending power and thus is preempted by the NBA.
In a 3-0 decision, a Second Circuit panel reversed, ruling the NBA does preempt New York’s IOE law. The Second Circuit analyzed whether the state law “would exert control over a banking power—and thus, if taken to its extreme, threaten to destroy the grant made by the federal government.” The Second Circuit did not assess “whether the degree of the state law’s impact on national banks would be sufficient to undermine that [banking]power.” In the Second Circuit’s view, “it is the nature of an invasion into a national bank’s operations—not the magnitude of its effects—that determines whether a state law purports to exercise control over a federally granted banking power and is thus preempted.”
Ultimately, the Second Circuit found that New York’s IOE law would control the exercise of the national bank’s power to create and fund escrow accounts by requiring the bank to pay its customers interest. As a result, the Second Circuit concluded the NBA preempts New York’s IOE law.
The Second Circuit’s decision split from the Ninth Circuit. In 2018, in Lusnak v. BofA, the Ninth Circuit ruled the NBA does not preempt California’s IOE law. The Ninth Circuit reasoned the IOE law did not “prevent or significantly interfere” with BofA’s exercise of its national bank powers. The U.S. Supreme Court declined to review the Ninth Circuit’s decision. In Flagstar Bank v. Kivett, the Ninth Circuit concluded its prior ruling in Lusnak required a finding that the NBA does not preempt California’s IOE law.
The U.S. Supreme Court invited U.S. Solicitor General Elizabeth Prelogar to weigh in on whether the Court should review. Prelogar argued the Court’s review was unwarranted at this time. According to Prelogar, neither circuit court’s preemption analysis was correct because they did not follow the Dodd-Frank Act’s preemption requirements. Despite Prelogar’s amicus brief, the U.S. Supreme Court agreed to examine the issue.
Bottom Line: The U.S. Supreme Court did not address the disposition of the pending petition in Flagstar Bank FSB v. Kivett.