NATIONAL BANK ACT
Flagstar Bank v. Kivett
Date: June 10, 2024
Issue: Whether the National Bank Act (NBA) preempts state laws requiring national banks to pay interest on mortgage escrow accounts.
Case Summary: The U.S. Supreme Court granted Flagstar Bank’s certiorari petition, vacating a Ninth Circuit decision concluding the National Bank Act did not preempt California’s interest-on-escrow (IOE) statute.
Flagstar loaned William Kivett $400,610 to finance a 2012 real estate purchase in California. Kivett filed a class action alleging Flagstar failed to pay interest on his mortgage escrow account. Kivett also asserted a claim under California’s Unfair Competition Law, which mandates financial institutions pay at least 2% interest annually on escrow accounts associated with certain residential mortgage loans.
Flagstar argued the NBA preempts state laws requiring national banks to pay interest on mortgage escrow accounts. A California federal district court ruled the NBA did not preempt California’s IOE statute, and the Ninth Circuit affirmed. In reaching its decision, the Ninth Circuit reaffirmed its prior ruling in Lusnak, which rejected the preemption challenge to California’s IOE statute. The Ninth Circuit also refused to adopt the Second Circuit’s recent decision in Cantero v. Bank of America, which ruled the NBA preempted New York’s IOE law.
In its certiorari petition, Flagstar argued the Ninth Circuit’s decision conflicts with decisions from the First, Second, Sixth, and Eighth Circuits and the California Supreme Court. Flagstar also argued the NBA preempts California’s IOE law because it significantly interferes with its power to issue loans.
Additionally, ABA filed a coalition amicus brief urging the Court to grant Flagstar’s petition and reverse the Ninth Circuit’s ruling. The American Bankers Association argued review is warranted to resolve the circuit split and correct the Ninth Circuit’s decisions in Flagstar and Lusnak. Moreover, ABA argued the Ninth Circuit’s decision risks turning the national banking system into a patchwork 50-state banking system.
On May 30, 2024, the U.S. Supreme Court vacated the Second Circuit’s decision in Cantero. In a unanimous decision written by Justice Brett Kavanaugh, the Court ruled that courts must conduct a practical assessment of the nature and degree of the interference when determining whether a state regulation significantly interferes with the national bank’s exercise of its powers and is thus preempted under Barnett Bank.
In light of Cantero, the U.S. Supreme Court granted Flagstar’s petition and remanded the case to the Ninth Circuit for further consideration. The Court did not elaborate further on its decision.
Bottom Line: The U.S. Supreme Court’s decision in Cantero left the question of whether state IOE laws are federally preempted unresolved. The remand of Cantero and Flagstar starts another round of lower court rulings on these laws.
Documents: Order List, Petition
