A group of non-profit consumer advocacy organizations, the Conference of State Bank Supervisors, and the American Association of Residential Mortgage Regulators filed two separate briefs asking the U.S. Supreme Court to overturn a Second Circuit decision holding that New York’s escrow interest law is preempted by the National Bank Act (NBA) under the “ordinary legal principles of pre-emption.” Under the NBA, a state law is preempted if the law “prevents or significantly interferes with the exercise by the national bank of its powers.”

The case arose out of the plaintiffs’ home mortgage loans with the defendant. The loan agreements, governed by New York law, required the plaintiffs to deposit money into escrow accounts to cover property taxes and insurance payments. When the defendant paid no interest on the escrowed amounts, the plaintiffs sued for breach of contract, claiming that they were entitled to interest under New York General Obligations Law § 5-601 which requires at least 2% interest on such mortgage-escrow accounts. The defendant moved to dismiss on the ground that § 5-601 does not apply to mortgage loans made by federally chartered banks because it is preempted by the NBA. The district court denied the motion to dismiss and certified the preemption issue for interlocutory review.

On September 15, 2022, the U.S. Court of Appeals for the Second Circuit reversed the district court’s order holding that New York’s escrow law is preempted by the NBA under the “ordinary legal principles of pre-emption.”

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. And if taken to a greater degree, state authority to set minimum interest rates could infringe on national banks’ power to use mortgage escrow accounts altogether. The issue is not whether this particular rate of 2% is so high that it undermines the use of such accounts, or even if it substantially impacts national banks’ competitiveness. The power to set minimum rates is the ‘power to control,’ and the power to control is the ‘power to destroy.’

On October 13, the U.S. Supreme Court granted the plaintiffs’ petition for certiorari. Notably, there is a two-circuit split on this issue, as the Ninth Circuit held that California’s escrow interest law was not preempted by the NBA.

In their amici curiae brief, the consumer advocacy groups argue that both the statutory text and the background of Congress’s enactment of the Dodd-Frank Act, which codified the standard for NBA preemption, demonstrate that Congress intended a narrower form of preemption than the Second Circuit applied. “State laws play an important role in protecting consumers against fraud, abuse, and confusion in the realm of financial services and in supporting financial stability and health. Consequently, broad approaches to [NBA] preemption of state laws … harm consumers.” The Conference of State Bank Supervisors and American Association of Residential Mortgage Regulators concurred stating in their brief: “the ramifications of the decision below would create a financial marketplace dominated by national banks and severely impair the [s]tates’ ability to protect their residents from fraudulent and abusive financial practices.” The amici expressly asked that a regulation of the Office of the Comptroller of the Currency (OCC) taking a broad view of preemption be overruled and disregarded.

Our Take:

This is a “must watch” case in the 2024 term for lawyers representing federally chartered banks as the ruling will likely have broader implications outside of the escrow interest arena. The OCC, by regulation, has taken the view that state laws regulating the exercise of a national bank’s federal powers are broadly preempted, while advocates such as the amici here argue that national bank preemption of laws governing the conduct of federally chartered banks is narrow. This conflict, coupled with the federal circuit split on the issue, has rendered national bank state law conduct requirements in a state of flux.