American Bar Association’s Business Law Today - September 2022
On September 15, 2022, the U.S. Court of Appeals for the Second Circuit ruled in Cantero v. Bank of Am. that the National Bank Act (NBA) preempts a New York law requiring mortgage lenders to pay interest on mortgage escrow accounts as it relates to national banks. This ruling creates a circuit split on the issue of NBA preemption of state laws requiring payment of interest-on-escrow accounts.
In Cantero, plaintiffs obtained loans from Bank of America (BOA) to purchase homes in New York. Escrow accounts were established for the loans for the payment of insurance premiums and property taxes. NY Gen. Oblig. Law § 5-601 requires that interest at a rate of not less than 2% per year be paid on sums in an escrow account. BOA, however, did not pay interest on the Plaintiffs’ escrow accounts. Plaintiffs brought suit against BOA for failure to pay such interest, and BOA moved to dismiss on grounds that the New York law was preempted by the NBA. The district court denied BOA’s motion, holding that the New York law was not preempted. BOA appealed.
On appeal, the Second Circuit found that the NBA preempts NY Gen. Oblig. Law § 5-601. The court explained that the key question in determining whether the NBA conflicts with a state law is whether enforcement of the state law would have an impact on a banking power. After noting that the banking power at issue in this case was the ability to create and fund escrow accounts, the court concluded that the New York law was preempted because it “would target, curtail, and hinder a power granted to national banks by the federal government. By requiring a bank to pay its customers in order to exercise a banking power granted by the federal government, the law would exert control over banks’ exercise of that power.” The court also highlighted that its conclusion was consistent with prior statements issued by the New York Department of Financial Services and the Office of the Comptroller of the Currency.
Next, the court examined preemption in light of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), holding that Dodd-Frank’s express reference to the preemption standard used in the Barnett Bank, N.A. v. Nelson case was evidence that Dodd-Frank simply codified the NBA’s preemption standard; it did not change it. The court also examined and rejected the district court’s conclusion that Dodd-Frank’s amendment of the Truth in Lending Act (“TILA”) to require creditors to establish escrow accounts for certain mortgages and, if prescribed by federal or state law, to pay interest on these accounts to consumers, was suggestive of a larger intent to subject all escrow accounts to such laws. In rejecting the district court’s reasoning, the court stated that the plain language of the statute and its legislative history show Congress’s intent to only subject certain escrow accounts to state law rather than all accounts, noting that the enumeration of only some exceptions in a statute typically implies the exclusion of others. Additionally, the court emphasized that plaintiff Cantero’s mortgage predated the TILA amendments and as such, the district court erred by looking to those amendments to determine the correct preemption standard in Cantero’s case.
This ruling creates a circuit split on the issue of NBA preemption of state interest-on-escrow laws; in a similar case involving a California interest-on-escrow law, the Ninth Circuit concluded that California’s law was not preempted. This means the issue could be ripe for review by the Supreme Court in the near future.
Reprinted with permission from the American Bar Association’s Business Law Today September Month-In-Brief: Business Regulation & Regulated Industries.
