National Bank Act Preemption
Cantero v. Bank of America N.A.
Date: May 5, 2026
Issue: Whether the National Bank Act (NBA) preempts New York’s interest-on-escrow (IOE) law, New York General Obligations Law § 5-601.
Case Summary: In a 2–1 decision, a Second Circuit panel ruled that the NBA preempts New York’s IOE law.
Section 1044 of the Dodd-Frank Act codified the NBA preemption standard articulated in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). In Barnett Bank, the Supreme Court held that the NBA preempts a state law if it “prevents or significantly interferes with the exercise of a national bank’s power.”
In 2010, a class of borrowers sued BofA, alleging that it violated New York’s IOE law by failing to pay interest on their mortgage escrow accounts. BofA argued that the NBA preempts New York’s IOE law because the law significantly interferes with its federal lending powers.
In 2022, a Second Circuit panel unanimously ruled that the NBA preempts New York’s IOE law. The panel 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 panel concluded that New York’s IOE law controls the exercise of national banks’ power to create and fund escrow accounts by requiring banks to pay interest. Cantero petitioned the U.S. Supreme Court for review.
In 2023, the ABA filed a coalition amicus brief supporting BofA and urging the Supreme Court to affirm. The brief argued that mortgage escrow accounts are integral to national banks’ core mortgage lending powers, that Dodd-Frank did not alter the Barnett Bank standard, and that New York’s IOE law impermissibly restricts banks’ authority to determine interest on escrow accounts.
In 2024, however, the U.S. Supreme Court vacated and remanded the decision. The Court held that Dodd-Frank incorporates the Barnett Bank standard and requires a practical, fact-specific assessment of the degree of interference caused by state law, rather than a bright-line rule. The Court instructed lower courts to conduct a nuanced comparative analysis of prior precedent. It explained that state laws resembling the interference in Franklin, Fidelity, First National Bank of San Jose, and Barnett Bank are preempted, while laws more akin to Anderson, National Bank v. Commonwealth, and McClellan are not.
On remand, the majority again held that the NBA preempts New York’s IOE law. First, the majority concluded that federal law authorizes national banks to offer mortgage escrow accounts as part of their power to make and service real estate loans. The court explained that New York’s IOE law interferes with that power by requiring banks to pay at least 2% interest on escrow balances and by limiting the terms on which banks may offer escrow accounts. Federal law permits national banks to offer escrow accounts without paying interest, but New York law prohibits that practice.
Second, the majority analyzed how New York’s IOE law interferes with federal banking powers by examining the text and structure of both state and federal law. It emphasized that New York’s IOE law specifically targets banks, unlike the generally applicable laws at issue in McClellan and Anderson. The majority also found that federal law grants national banks broad authority to operate mortgage escrow accounts and determine whether to pay interest. It pointed to the Real Estate Settlement Procedures Act (RESPA), which regulates escrow accounts but does not require interest payments, and the Truth in Lending Act, which applies state interest requirements only to certain escrow accounts not at issue here.
Relying on Barnett Bank, Franklin, and Fidelity, the majority concluded that Congress’s decision to incorporate only some state escrow-interest laws indicates that similar state laws outside those provisions are preempted. Although federal law grants this authority indirectly rather than expressly, the majority held that New York’s IOE law closely resembles laws the Supreme Court has found preempted.
Finally, the majority concluded that New York’s IOE law substantially interferes with national banks’ ability to offer and manage mortgage escrow accounts efficiently. It explained that banks incur operational and compliance costs when administering escrow accounts and typically recover those costs through pricing and account terms. New York’s law, however, requires banks to pay at least 2% interest on many escrow accounts, which increases costs and may force banks to limit escrow accounts, shift costs to borrowers, or reduce mortgage lending. According to the majority, this interference closely resembles the interference the Supreme Court found preemptive in Franklin National Bank of Franklin Square v. New York because the law directly restricts banks’ ability to set account terms and pricing. Although higher interest rates may benefit some consumers, the majority found the overall consumer impact uncertain and concluded that the law imposes a substantial burden on national banks’ mortgage lending operations.
Judge Myrna Pérez dissented, arguing that New York’s IOE law does not resemble the types of state laws the Supreme Court has previously found preempted. She emphasized that the majority rejected the First Circuit’s decision in Conti v. Citizens Bank N.A., which upheld a similar Rhode Island escrow-interest law. Judge Pérez argued that Conti failed to fully consider the role of RESPA and the Truth in Lending Act in the Supreme Court’s preemption analysis and understated the practical impact of state pricing restrictions on national banking operations.
Bottom Line: The Second Circuit held that the NBA preempts New York’s IOE law because it significantly interferes with national banks’ federally authorized power to offer and manage mortgage escrow accounts by restricting banks’ ability to set account terms and pricing. The decision creates a circuit split with the First Circuit’s decision in Conti.
Document: Opinion
