US Supreme Court Decision Alert: Cantero v. Bank of America, N.A., No. 22-529

Introduction: Yesterday, the Supreme Court unanimously held that the Second Circuit applied the wrong standard in analyzing whether New York’s interest-on-escrow law is preempted by federal law. The Court held that the relevant standard—from Barnett Bank of Marian County, N.A. v. Nelson, 517 U.S. 25 (1996), as incorporated in the Dodd-Frank Act of 2010—requires assessment of relevant Supreme Court precedents to determine whether a state law prevents or significantly interferes with the exercise of a national bank’s powers.

Background: The United States has a dual banking system. Banks with federal charters, referred to as national banks, are subject to federal oversight and regulation.  Banks with state charters are subject to additional state oversight and regulation.

The National Bank Act grants national banks the authority to administer home mortgage loans. 12 U.S.C. § 371(a). When issuing mortgage loans, national banks offer escrow accounts to ensure funds are available to pay insurance premiums and property taxes on the borrower’s behalf. These escrow accounts are regulated under the Real Estate Settlement Procedures Act of 1974 (RESPA). RESPA does not mandate that national banks pay interest to borrowers on account balances. New York law, by contrast, requires banks to pay interest on balances held in escrow in connection with mortgages on certain real estate.

Petitioners are a putative class with home mortgage loans from Bank of America who did not receive interest on balances held in New York escrow accounts. The district court concluded that New York’s interest-on-escrow law was not preempted by federal law. The Second Circuit reversed, holding that New York law was preempted because it would exert control over a national bank’s power to create and fund escrow accounts.

Issue: Whether federal banking law preempts the application of state escrow-interest laws to national banks as a matter of law.

Court’s Holding: In a unanimous opinion authored by Justice Kavanaugh, the Supreme Court held that the Second Circuit erred in its analysis of whether federal banking law preempts New York’s interest-on-escrow law as applied to national banks. The Court explained that Congress, in the Dodd-Frank Act, provided that federal banking law preempts a state consumer law “only if” that state law does one of two things—(i) discriminates against national banks as compared to state banks, or (ii) “prevents or significantly interferes with the exercise by the national bank of its powers.”  Because New York’s interest-on-escrow law does not discriminate against national banks, only the second prong is relevant.

The Dodd-Frank Act provision expressly references the Supreme Court’s Barnett Bank decision in connection with the “prevents or significantly interferes” test, stating that a state consumer law is preempted “only if . . . in accordance with the legal standard for preemption in [Barnett Bank] the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers.” 12 U.S.C. § 25b(1)(B).

The Court today observed that Barnett Bank “looked to prior cases of this Court where the state law was preempted, as well as several cases where the state law was not preempted.”  In light of Congress’s direction to determine “significant interfere[nce] “in accordance with” Barnett Bank, a court addressing preemption in this context “must do as Barnett Bank did and likewise take account of those prior decisions of this Court and similar precedents.”

The court “must make a practical assessment of the nature and degree of the interference caused by a state law” and then compare the degree of interference with that in Barnett Bank, the cases it discussed, and other similar precedents.  “If the state law’s interference with national bank powers is more akin to the interference in cases [in which the Court found preemption], then the state law is preempted.  If the state law’s interference with national bank powers is more akin to the interference in cases [in which the Court did not find preemption], then the state law is not preempted.”

The Supreme Court concluded that the Second Circuit did not conduct that “nuanced comparative analysis,” but instead applied “a categorical test that would preempt virtually all state laws that regulate national banks, at least other than generally applicable state laws such as contract or property laws.” It therefore vacated the lower court’s judgment and remanded the case for application of the standard described in today’s opinion.

The Court “appreciate[d] the desire by both parties for a clearer preemption line one way or the other,” but concluded that Congress’s adoption of Barnett Bank “did not draw a bright line.”

Read the opinion here.