A federal appeals court this week ruled that New York State’s interest-on-escrow law is preempted by the National Bank Act, with the decision coming after the U.S. Supreme Court directed the lower court to reconsider an earlier decision on the case.
New York, California and at least 10 other states have enacted interest-on-escrow laws in recent years. In Cantero v. Bank of America, the U.S. Court of Appeals for the Second Circuit previously concluded that New York’s law was preempted by federal law. However, the Supreme Court vacated the decision and directed the lower court to conduct a “nuanced comparative analysis.”
In a 2-1 decision released this week, the appellate court said it did just that and again determined that the New York law was preempted. First, New York’s interest-on-escrow requirement affects a national banking power: the power to offer mortgages, the majority concluded. Second, it targets banks and limits their broad power to set the terms of mortgage-escrow accounts, so it is similar in nature to other preempted laws. Finally, its degree of interference on banks’ ability to make real-estate loans efficiently is similarly severe to the interference created by a separate law on advertising that the courts have previously determined was preempted.
Federal regulators may soon weigh in on the issue. Late last year, the Office of the Comptroller of the Currency issued a proposed rule to reassert preemption of federal law over state escrow law in the case of national banks and federal savings associations. The OCC also released a second, related proposal to codify the longstanding powers of national banks and federal savings associations to establish or maintain the terms and conditions for real estate lending escrow accounts
