National Bank Act preemption
Flagstar Bank v. Kivett
Date: Oct. 16, 2024
Issue: Whether the National Bank Act (NBA) preempts state laws requiring national banks to pay interest on mortgage escrow accounts.
Case Summary: ABA filed a coalition amicus brief supporting Flagstar Bank’s petition for a full panel rehearing of a Ninth Circuit decision which ruled the NBA does not preempt California’s interest-on-escrow (IOE) statute.
Flagstar loaned $400,610 to William Kivett 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. In response, 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 law, and the Ninth Circuit affirmed, highlighting its prior ruling in Lusnak v. Bank of America, N.A., which rejected the preemption challenge to California’s IOE statute.
On May 30, 2024, the U.S. Supreme Court vacated the Second Circuit’s decision in Cantero v. Bank of America, ruling 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 vacating the Ninth Circuit’s decision and remanded the case to the Ninth Circuit for further consideration. On remand, a unanimous Ninth Circuit panel reaffirmed the district court’s decision ruling California’s IOE law is not preempted by the NBA. The panel ruled it was bound by its prior Lusnak decision, which upheld the same California provision. The panel concluded “Cantero suggests that Lusnak was correctly decided,” because Lusnak “properly applied” the Barnett preemption analysis.
In its brief, ABA urged the Ninth Circuit to grant a rehearing. The brief highlighted that the panel’s decision to issue an opinion without supplemental briefing on remand — contrary to standard practice — raises serious concerns warranting rehearing. After the Supreme Court vacated and remanded Cantero, the Second Circuit sought supplemental briefs from all parties to apply the Court’s nuanced comparative analysis framework, as did the First Circuit in Conti v. Citizens Bank, N.A. ABA argued that similar briefing in the Ninth Circuit is critical, given the case’s implications for national banks. Even more so, ABA maintained the panel’s decision risks inviting states to impose pricing restrictions and other requirements on national banks, disrupting longstanding precedents protecting national banking operations.
ABA also argued rehearing is warranted to correct the panel’s decision that California’s price control does not “significantly” interfere with national bank powers. ABA highlighted the panel’s decision is inconsistent with Cantero because the NBA grants national banks the power “to administer home mortgage loans” and “all such incidental powers as shall be necessary to carry on the business of banking.” ABA reiterated state laws are preempted if they “prevent or significantly interfere” with these powers. To apply this standard, courts must undertake a “practical assessment of the nature and degree of the interference caused by state law” which entails a close examination of the “text and structure of the laws, comparison to other precedents and common sense.”
ABA emphasized that the panel failed to follow the proper preemption standard or mode of analysis in four ways:
- The panel disregarded the seven prior Supreme Court decisions that cited in Cantero as the relevant precedent;
- Even if the panel applied the proper standard, it failed to conduct the mandated “nuanced comparative analysis;”
- A court would need to undertake a fact-intensive inquiry to determine whether a state-imposed price control is punitive, as required under Lusnak; and
- The panel failed to grant appropriate weight to the OCC, the authority created by Congress to regulate national banks.
Additionally, ABA explained the panel’s decision is based on the now-rejected view holding the Truth in Lending Act (TILA) amendment overrode NBA preemption for escrow accounts. By relying exclusively on Lusnak in concluding California’s IOE law is not preempted, the panel committed another error. Lusnak relied on TILA’s Section 1639d in reaching its preemption decision which requires “the payment of interest on certain mortgage escrow accounts if prescribed by applicable State or Federal Law.” According to Lusnak, Section 1693 expressed congressional intent to overcome NBA preemption as to State IOE laws. However, in Cantero, the Supreme Court found Section 1693d was irrelevant to the analysis because it did not apply to the mortgage at issue. Similarly, Section 1693d is irrelevant in this case as no party has ever claimed TILA applies to the escrow accounts at issue.
Bottom Line: As of Nov. 1, the Ninth Circuit has not yet reached a decision on whether to grant Flagstar’s petition for rehearing.
Documents: Amicus Brief
