National Bank Act preemption
Cantero v. Bank of America N.A.
Date: Oct. 25, 2024
Issue: Whether the National Bank Act (NBA) preempts New York’s interest on escrow (IOE) law.
Case Summary: ABA filed a coalition amicus brief urging the Second Circuit to reaffirm the NBA preempts New York’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.”
In this case, a class of borrowers sued Bank of America, alleging it violated New York’s IOE law by not paying interest on their mortgage accounts and is preempted as it significantly interferes with its federal lending power. In a 3-0 decision, the Second Circuit ruled the NBA preempts New York’s IOE law, finding that the law would control the exercise of the national bank’s power to create and fund escrow accounts by requiring the bank to pay its customers’ interest. The Second Circuit’s Cantero ruling split from the Ninth Circuit’s rulings in Flagstar Bank v. Kivett and Lusnak v. Bank of America.
In a unanimous decision written by Justice Brett Kavanaugh, the U.S. Supreme Court vacated and remanded the Second Circuit decision, explaining the Second Circuit did not apply the correct test under Barnett Bank. The Court explained the Dodd-Frank Act expressly incorporated the preemption standard from Barnett Bank, which did not permit “bright line” rules. It requires courts to engage in a “practical assessment of the nature and degree of the interference caused by a state law” and conduct a “nuanced comparative analysis” when looking at Barnett Bank and the decisions cited in that opinion.
In its brief, ABA argued state-imposed pricing schemes “significantly interfere” with national bank powers and are preempted. The brief explained 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.” 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 New York’s IOE law interferes with a national bank’s power to a far greater extent than New York’s advertising law. 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 noted by imposing the pricing terms under which national banks may offer escrow accounts, New York’s IOE law significantly interferes with national banks’ power to administer home loans. By requiring national banks to pay prescribed interest rates on the accounts at issue, ABA argued New York’s IOE law interferes with the flexibility needed to effectively manage risk and offer products with sufficient returns, undermining the “safety and soundness” of national banks.
In addition, ABA pointed out why each of the plaintiffs’ arguments failed. First, plaintiffs argued BofA must furnish additional evidence to show a material effect on its operations, claiming in Franklin there was a “large record” of real-world consequences. However, ABA explained neither Franklin nor any of the identified cases in Cantero require a large record to determine whether the law was preempted. Second, plaintiffs argued this case is unique because it does not involve the “exercise of an express banking power.” Yet, ABA noted whether the power is express or implied is irrelevant for assessing NBA preemption. Finally, plaintiffs argued there is no significant interference because other banks have been complying with the law. ABA pointed out, however, that whether national banks can comply with the law “without material impairment” is not the appropriate legal standard.
ABA also argued the OCC’s regulations support the conclusion holding New York’s IOE law 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 with state laws that are inconsistent with the exercise of national banks’ real estate lending powers.
Finally, ABA explained the TILA amendment is not applicable to this preemption analysis. Plaintiffs urged the court to consider TILA’s Section 1639d in the preemption analysis, arguing the provision reflects Congress’ view that banks can comply with interest on escrow laws. 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. Due to this, plaintiffs claimed the statute reflects Congress’s judgment that “creditors, including large corporate banks like Bank of America, can comply with state escrow interest laws without any significant interference with their banking powers.” However, in Cantero, the Supreme Court noted all parties agreed Section 1639 does not apply to the mortgage in this case, rendering the TILA provision inapplicable to this preemption analysis.
Bottom Line: Plaintiffs’ reply brief is due Nov. 1, 2024.
Document: Brief
