On April 23, the Office of the Comptroller of the Currency Bank added its support to Bank of America’s efforts to convince the Ninth Circuit to review a March 2 panel decision holding that the National Bank Act does not preempt a California state law requiring the payment of 2% interest on escrow accounts. “The panel decision errs in matters of fundamental importance to the national banking system” and “therefore presents the rare case that justifies rehearing,” the OCC wrote.
The case arises from a 2014 putative class action filed by borrower Donald Lusnak, alleging that Bank of America violated California’s Unfair Competition law by failing to pay 2% interest on mortgage escrow accounts, as required by a 1976 California statute. Bank of America argued, on a motion to dismiss, that the California law was preempted by the National Bank Act and its implementing regulations. The lower court agreed, holding that national banks’ incidental powers include providing and servicing escrow accounts and that the California law constituted a significant interference with those powers. The court also held that Dodd-Frank revisions to TILA (which took effect in 2013) did not apply retroactively to the plaintiff’s account and, more importantly, did not “expressly condition” the grant of a national bank’s powers on compliance with state law.
On appeal, a panel of the Ninth Circuit reversed, holding that the Dodd-Frank Act emphasized that the legal standard of preemption set forth in Barnett Bank of Marion County, N.A. v. Nelson applies to questions of whether state consumer financials laws are preempted. Under this standard, a state law is preempted if it “prevents or significantly interferes with the exercise by the national bank of its powers.”
Turning to the preemption question, the panel held that the California law did not rise to the level of significant interference. Specifically, the court pointed to another Dodd-Frank revision – TILA – which requires creditors to pay interest on escrow accounts “if prescribed by applicable state or federal law,” suggesting that Congress did not intend for the NBA to preempt state escrow interest laws. And – more importantly for the case at hand – the panel held that the California law had never been preempted, even before the enactment of Dodd-Frank. The panel dismissed Bank of America’s argument that OCC regulations specifically addressed the preemption issue, finding that the OCC had “inaccurately” interpreted the preemption standard articulated by Barnett Bank. Moreover, those regulations were not entitled to much deference, the panel held.
Interestingly, in a footnote, the court noted that it was not suggesting that “a state escrow interest law can never be preempted by the NBA” and that a state law setting “punitively high rates” may prevent or significantly interfere with a national bank’s business, raising the specter of multiple case-by-case determinations as to when a state escrow interest statute is “punitively high” and when it is not.
On April 13, Bank of America filed a Petition for Rehearing En Banc. In an amicus brief filed on April 23, the OCC called on the full court to grant the Petition, contending that the panel’s criticism of its regulation is “baseless” and that “numerous courts have sustained” the agency’s interpretation of Barnett Bank. The OCC also took issue with the panel’s reliance on Dodd-Frank’s amendments to TILA, arguing that those provisions cannot influence the issue because they went into effect after the borrower obtained his mortgage. On April 20, the American Bankers Association, U.S. Chamber of Commerce, and other industry groups submitted their own amicus brief also urging the Ninth Circuit to review the panel’s decision.
The resolution of this issue is an important one for national banks. As the Ninth Circuit pointed out, thirteen states have escrow interest laws similar to California’s. If the panel decision is not reversed, we expect that national banks will face growing litigation on this issue both in those states and in California. Already in California, at least four lawsuits have been filed in the wake of Lusnak in an attempt by plaintiffs’ lawyers to capitalize on the panel’s decision.