NATIONAL BANK ACT PREEMPTION
Cantero v. Bank of America N.A.
Date: May 30, 2024
Issue: Whether the National Bank Act (NBA) preempts New York’s interest on escrow (IOE) law.
Case Summary: In a unanimous decision written by Justice Brett Kavanaugh, the U.S. Supreme Court vacated a Second Circuit decision ruling the NBA preempted New York’s IOE law, ruling the Second Circuit did not properly apply Barnett Bank.
Section 1044 of the Dodd-Frank Act codified the NBA preemption standard from the Supreme Court’s decision in Barnett Bank of Marion County N.A. v. Nelson, 517 U.S. 25 (1996). In Barnett Bank, the Supreme Court ruled the NBA preempts state law if it “prevents or significantly interferes with the exercise of a national bank’s power.”
In this case, a class of borrowers sued Bank of America alleging it violated New York’s IOE law by not paying interest on their mortgage accounts. BofA contended the NBA preempts New York’s IOE law because it significantly interferes with its federal lending power.
In a 3-0 decision, the Second Circuit ruled the NBA preempts 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.” 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.
The Second Circuit’s Cantero ruling split from the Ninth Circuit’s rulings in Flagstar Bank v. Kivett and Lusnak v. Bank of America. In Flagstar Bank, the Ninth Circuit concluded its prior ruling in Lusnak required a finding that the NBA does not preempt a California interest escrow requirement. The Lusnak court reasoned that, because Congress required creditors to comply with state interest escrow laws for certain mortgage escrow accounts through a provision of the Dodd-Frank Act amending the Truth in Lending Act, Congress recognized national banks may comply with state escrow interest laws without significant interference with their banking powers. Based on this rationale, the Ninth Circuit found that the NBA did not preempt California’s interest escrow law.
Upon invitation by the Supreme Court, the U.S. solicitor general filed an amicus brief discussing both the Cantero and Flagstar petitions. The U.S. Solicitor General argued both the Second Circuit and Ninth Circuit applied the wrong test for NBA preemption. According to the solicitor general, the Circuit courts should have engaged in “a practical assessment of the degree to which the state law will impede the exercise of” a national bank’s powers related to escrow accounts. Still, the solicitor general recommended the Supreme Court decline to review both Cantero and Flagstar Bank, asserting both cases are poor vehicles to resolve the current circuit split on NBA preemption and state escrow interest statutes.
ABA filed a coalition amicus brief urging the Supreme Court to affirm the Second Circuit for three reasons. First, mortgage escrow accounts are critical to national banks’ core power to make mortgage loans. Second, the Second Circuit correctly ruled state IOE laws are preempted by federal law because Dodd-Frank’s preemption provision did not alter the NBA preemption standard in Barnett Bank. Finally, New York’s IOE Law is preempted under Barnett Bank because it prevents a national bank from exercising its power to determine what interest to pay on escrow accounts.
The Supreme Court, however, vacated the Second Circuit’s decision and remanded for it to apply a different legal standard. The Court explained the Dodd-Frank Act expressly incorporated the preemption standard from Barnett Bank. That standard, according to the Court, did not permit “bright line” rules, but requires courts to engage in a “practical assessment of the nature and degree of the interference caused by a state law” and conduct a “nuanced comparative analysis,” looking at Barnett Bank and the decisions cited in that opinion.
In assessing the significance of a state law’s interference, the Court declared: “if the state law’s interference with national bank powers is more akin to the interference in cases like Franklin, Fidelity, First National Bank of San Jose, and Barnett Bank itself, then the state law is preempted. If the state law’s interference with national bank powers is more akin to the interference in cases like Anderson, National Bank v. Commonwealth, and McClellan, then the state law is not preempted.”
Bottom Line: The Court remanded for the Second Circuit to apply a more nuanced, practical assessment of New York’s IOE law.
Document: Opinion
