On May 30, 2024, in a unanimous decision, the Supreme Court reversed Cantero v. Bank of America, N.A., and remanded it back to the Second Circuit and instructed the appellate court to analyze whether New York’s law requiring interest to be paid on mortgage escrow accounts is preempted under the Dodd-Frank Act by applying the Barnett Bank standard. No bright line test for preemption was articulated by the Court; instead, the Court relied on Barnett Bank and its earlier precedents dealing with National Bank Act (NBA) preemption.

The question before the Supreme Court was whether the NBA preempts application of that New York interest-on-escrow law to national banks. The District Court determined that the New York law applied to national banks and was not preempted under federal law or the NBA. The Second Circuit reversed, holding that the New York law was preempted by the NBA. The Second Circuit held 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 Second Circuit concluded that the New York law was preempted because it exerted control over a national bank’s powers to fund escrow accounts.

The Supreme Court held that the Second Circuit failed to analyze whether New York’s interest-on-escrow law is preempted as applied to national banks in a manner consistent with Dodd-Frank and Barnett Bank. Section 1044 of Dodd Frank provides that a state consumer financial law is preempted if it would have a discriminatory impact on national banks as compared to banks chartered by the same state or if “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank…, the State consumer financial law prevents or significantly interferes with the exercise by a national bank of its powers.” 12 U.S.C. §25b (1)(B). Since the New York law does not discriminate against national banks, the law is preempted only if it “prevents or significantly interferes” with a national bank’s powers. The Court noted that “[g]iven Dodd-Frank’s direction to identify significant interference ‘in accordance with’ Barnett Bank, courts addressing preemption questions in this context must do as Barnett Bank did and likewise take account of those prior decisions of this Court and similar precedents.”

The Supreme Court concluded that the Second Circuit “did not conduct that that kind of nuanced comparative analysis” required under Barnett Bank and stated:

A court applying that Barnett Bank standard must make a practical assessment of the nature and degree of the interference caused by a state law. If the state law prevents or significantly interferes with the national bank’s exercise of its powers, the law is preempted. If the state law does not prevent or significantly interfere with the national bank’s exercise of its powers, the law is not preempted. In assessing the significance of a state law’s interference, courts may consider the interference caused by the state laws in Barnett Bank, Franklin, Anderson, and the other precedents on which Barnett Bank relied. If the state law’s interference with national bank powers is more akin to the interference in cases like Franklin, Fidelity, First National Bank of San Jose, and Barnett Bank itself, then the state law is preempted. If the state law’s interference with national bank powers is more akin to the interference in cases like Anderson, National Bank v. Commonwealth, and McClellan, then the state law is not preempted.

The cases where the state laws were found to be preempted under the NBA are:

• First National Bank of San Jose v. California, 262 U.S. 366, 369-70 (1923) (a California law allowed the state to claim deposits that went “unclaimed for more than twenty years” without requiring the account to be abandoned was preempted because it interfered with the “efficiency” of the national bank in receiving deposits);
• Franklin National Bank of Franklin Square v. New York, 347 U.S. 373, 378-379 (1954) (a New York law prohibiting banks from using the words “saving” or “savings” in advertising their business was preempted because it interfered with the national bank’s statutory power to receive savings deposits);
• Fidelity Federal Savings & Loan Association v. De la Cuesta, 458 U.S. 141, 155 (1982)(a California law limiting due-on-sale clauses was preempted because the savings and loan could not exercise a due-on-sale clause “solely at its option;” but case involved Federal Thrift and not NBA preemption of state laws which was field preemption); and
• Barnett Bank of Marion Cty., N. A. v. Nelson, 517 U.S. 25, 35-36 (1996) (a Florida law prohibiting banks from selling insurance was preempted because is significantly interfered with a bank’s power authorized by federal law to sell insurance).

The cases where the state laws were not found to be preempted are:

• Anderson National Bank v. Luckett, 321 U.S. 233, 249 (1944) (a Kentucky law that required banks to escheat abandoned property was not preempted because the law did “not infringe or interfere with any authorized function of the bank”);
• National Bank v. Commonwealth, 9 Wall. 353, 352-363 (1870) (a Kentucky law that taxed all bank shareholders on their shares of bank stock was not preempted because it did not hinder the bank’s operations); and
• McClellan v. Chipman, 164 U.S. 347, 358 (1896) (a generally applicable Massachusetts contract law was not preempted because it did not “in any way impai[r] the efficiency of national banks or frustrat[e] the purpose for which they were created”).

These cases that the Supreme Court suggests the Second Circuit use for comparative analysis are unlikely to be helpful in deciding on which side of the line the New York interest-on-escrow law falls.

The following statement from the opinion sums up the difficultly in preemption determinations going forward:

We appreciate the desire by both parties for a clearer preemption line one way or the other. But Congress expressly incorporated Barnett Bank into the U.S. Code. And in determining whether the Florida law at issue there was preempted, Barnett Bank did not draw a bright line.

Additionally, in a footnote at the end of the opinion, the Supreme Court indicated that the Second Circuit could consider the significance of any of the preemption rules adopted by the Office of Comptroller of the Currency (OCC) even though it implicitly rejected the preemption analyses previously done by the OCC, and whether, as provided in Section 1044(b)(1)(C) of Dodd Frank, any other federal law preempts the state consumer financial law (the District Court found no preemption under TILA, RESPA, and Dodd-Frank). The Department of Justice criticized the OCC’s “different and broader view of NBA preemption” in its amicus brief. By way of background, shortly after the enactment of Dodd-Frank, the OCC promulgated a regulation saying that many categories of state laws were automatically preempted. The new post Dodd-Frank regulation was strikingly similar to the pre-Dodd-Frank regulation. Many, if not most, national banks reasonably relied on the OCC’s categorical preemption which the Supreme Court has now rejected.

Last December, Democratic Senators sent a letter to Acting Comptroller of the Currency Michael Hsu “to address [the OCC’s] longstanding expansion of its preemption authority to undermine state consumer protections.” The letter claimed that OCC has not followed the preemption authority requirement in Section 1044 of Dodd Frank and interfered with states exercising authority for non-preempted consumer protection laws.

We have previously expressed practical concerns with relying upon the OCC’s categorical preemption after the passage of Dodd-Frank. Under Dodd-Frank, an OCC preemption determination is no longer entitled to special Chevron deference and instead receives more limited Skidmore deference, whether or not the determination is made under the Barnett Bank standard and whether or not it addresses a “State consumer financial law.”

We expect a more liberal analysis from the Second Circuit than we have seen from the Fifth Circuit with limited deference to the OCC’s preemption determinations. With no bright line test, the Barnett Bank analysis as to whether a state law like New York’s interest on escrow accounts “prevents or significantly interferes” with a national bank’s powers could vary based on a bank’s asset size. Moreover, it would seem that a law preempted at one time may later cease to be preempted if the impact on the bank changes as a result of the bank’s growth or even as the result of technological innovations implemented by the bank. The practical implication of this is that preemption analysis by banks must be a (recurring) fact intensive exercise. We will monitor the Second Circuit’s decision and see whether the appellate court rules or kicks the case back to the district court.

The takeaway from this opinion is that national banks may have to take a fresh look at all potentially applicable state laws, not just those dealing with mortgage escrow accounts, with which they are not complying and determine, after conducting a thorough “significant impairment” analysis, whether they should change their positions. This is a time consuming and costly exercise, but one that may be necessary to avoid class action litigation.

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