National Bank Act Preemption
Conti v. Citizens Bank, N.A.
Date: Nov. 4, 2024
Issue: Whether the National Bank Act (NBA) preempts Rhode Island’s interest on escrow (IOE) law.
Case Summary: The American Bankers Association filed a coalition amicus brief urging the First Circuit to affirm the NBA preempts Rhode Island’s IOE law.
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), ruling the NBA preempts state law if it “prevents or significantly interferes with the exercise of a national bank’s power.”
Under Rhode Island’s IOE law, banks must pay interest on amounts customers deposit into mortgage escrow accounts. Conti and a class of borrowers (plaintiffs) sued Citizens Bank, alleging it breached its mortgage agreement by failing to pay the required interest. Citizens Bank moved to dismiss, arguing the NBA preempts Plaintiffs’ claims because it need not pay interest on mortgage escrow accounts under the NBA.
In September 2022, Judge Mary S. McElroy of the U.S. District Court of Rhode Island dismissed plaintiffs’ lawsuit, ruling that the IOE law is preempted because it limits national banks’ asserted power to establish escrow accounts. The district court cited the Second Circuit’s decision in Cantero holding that New York’s IOE law was preempted under Barnett Bank and Dodd-Frank because the law would exert control over banks’ exercise of a national banking power, regardless of “the magnitude of its effects.” While Conti’s appeal was pending in the First Circuit, the U.S. Supreme Court granted certiorari in Cantero. Due to this, the First Circuit granted a stay until Cantero was decided. On May 30, 2024, the 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 its brief supporting Citizens Bank, ABA argued mortgage escrow accounts are critical tools in the U.S. banking system. The brief emphasized how these accounts are indispensable in residential mortgage lending by enhancing efficiency and stability within the banking and financial systems. ABA also noted mortgage escrow accounts have become a fundamental aspect of risk management in residential mortgage lending by safeguarding the interests of both lenders and borrowers. This, in turn, allows lenders to offer homeowners loans at reduced rates.
ABA also argued Rhode Island’s pricing scheme significantly interferes with the exercise of national bank powers. Applying Cantero, ABA explained that Rhode Island’s pricing scheme is preempted. Cantero declared that in assessing the “significance” of state-level interference, the precedent is instructive: “if the state law’s interference with national bank powers is more akin to the interference where preemption was found, the state law is preempted.” In the brief, ABA highlighted the “paradigmatic example of significant interference” in Franklin National Bank of Franklin Square v. New York, which involved a New York law prohibiting banks from using the word “saving” or “savings” in their advertising or business. The Court held the law interfered with banks’ statutory powers to receive savings deposits. ABA emphasized that the interference in Rhode Island’s pricing scheme is far more significant than the law in Franklin. During oral arguments, Justice Kavanaugh remarked “the pricing of the product almost by definition interfere[s] more with the operations of a bank than something that affects advertising.”
ABA also pointed out why each of plaintiffs’ arguments failed. First, plaintiffs argued this case is distinguishable from other Supreme Court precedents, including Franklin and Barnett, because Rhode Island’s IOE law does not interfere with an “express power.” However, ABA explained the distinction of the case involving an express power made no difference because the U.S. Supreme Court held in Watters v. Wachovia Bank that states may not burden the exercise of national banks’ lending power or “curtail or hinder a national bank’s efficient exercise of any other power, incidental or enumerated.” Second, plaintiffs argued the level of interference in their case is more akin to cases, such as Anderson National Bank v. Luckett, where the Court held that state laws were not preempted. However, ABA explained that the decision in Anderson differs because it is premised on finding interference with no national bank power and not that the interference was somehow minimal. Finally, plaintiffs argued the “consensus” is that state IOE laws do not significantly interfere with national bank powers. ABA noted, however, that none of the authorities that plaintiffs cited support a consensus that the NBA does not preempt Rhode Island’s pricing scheme.
In addition, ABA argued that remand is unnecessary in light of the Court’s direction in Cantero. Despite the Court establishing a clear legal framework to analyze whether state laws are preempted, Plaintiffs urged the First Circuit to remand the case to the district court to engage in a fact-intensive approach. ABA underscored that Plaintiffs’ insistence on a fact-intensive inquiry contradicts the Supreme Court’s guidance. In Cantero, the Court explained that preemption of a state law focuses on whether the law significantly interferes with national bank powers, which is a legal question rather than a question requiring prolonged factual investigation.
ABA also argued the Office of the Comptroller of the Currency’s (OCC) regulations support the conclusion that Rhode Island’s pricing scheme significantly interferes with national bank powers. In 2004, the OCC published a final rule listing certain state laws preempted by the NBA. The OCC’s list includes state laws “concerning … escrow accounts” for real estate loans. This regulation was based on OCC’s experience determining which state laws are inconsistent with the exercise of national banks’ real estate lending powers.
Finally, ABA argued the Truth in Lending Act (TILA) amendment is irrelevant to the NBA preemption analysis. Plaintiffs contended the First Circuit should rely on the 2010 Dodd-Frank Act’s TILA amendment, arguing that Congress’ views that national banks can comply with state laws that mandate minimum interest rates on escrow accounts. Under TILA, lenders must pay interest on borrowers’ funds in mortgage escrow accounts in accordance with “applicable” state laws for certain types of mortgages specified in Section 1639 of TILA. However, in Cantero, the Court noted that all parties agreed Section 1639 does not apply to the mortgage, rendering the TILA provision inapplicable to this preemption analysis.
Bottom Line: Conti’s reply brief is due Dec. 3, 2024.
Document: Brief
