On May 30, 2024, the U.S. Supreme Court decided Cantero v. Bank of America, N.A., No. 22-529, holding that courts must conduct a practical assessment of the nature and degree of the interference when determining whether a state regulation “significantly interferes with the exercise by the national bank of its powers” and is thus preempted by the Dodd-Frank Act.

When national banks make home mortgage loans, they often offer escrow accounts. Federal law regulates these escrow accounts, but it does not require federally chartered banks to pay interest to the borrowers on the amount in the account. New York law, on the other hand, requires banks operating in the state to pay two percent annual interest on the amount in the account.

In a lawsuit brought by several borrowers, a federal district court held that the New York requirement was not preempted because it did not “prevent[ ] or significantly interfere[ ] with the exercise by the national bank of its powers.” The Second Circuit reversed, holding that federal law preempts any state law that “purports to exercise control over a federally granted banking power,” regardless of “the magnitude of its effects.”

The Supreme Court vacated the Second Circuit’s decision and remanded for it to apply a different legal test. The Court explained that the Dodd-Frank Act expressly incorporated the preemption standard from the Court’s earlier decision in Barnett Bank. That standard, the Court said, did not permit “bright line” rules, but instead required 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,” looking at Barnett Bank and the decisions cited in that opinion. The Court remanded for the Second Circuit to apply that practical assessment to New York’s interest requirement.

Justice Kavanaugh delivered the opinion for a unanimous court.

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