On May 5, the U.S. Court of Appeals for the Second Circuit issued its long‑awaited decision on remand in Cantero, again holding that New York’s 2% interest‑on‑escrow statute (General Obligations Law § 5‑601) is preempted as applied to national banks. This follows the U.S. Supreme Court’s unanimous 2024 opinion (discussed here), which vacated the Second Circuit’s earlier decision and instructed the court to apply the Barnett Bank “prevents or significantly interferes” standard through a “nuanced comparative analysis” of prior preemption precedents.

The Majority’s Short Opinion on Remand

In a brief opinion, the court concluded that New York’s escrow‑interest requirement is preempted even under the Supreme Court’s refined Barnett Bank framework. The panel held that:

• The statute “affects a national banking power”: the power to offer mortgage loans and to decide whether and on what terms to require and operate mortgage‑escrow accounts.
• By imposing a fixed minimum interest rate on escrow balances and applying only to mortgage‑lending institutions, the law “targets banks” and limits their ability to set key price terms of escrow accounts, making its nature of interference similar to the state restrictions struck down by the Supreme Court in prior decisions.
• Its degree of interference on banks’ ability to efficiently make real estate loans is similarly severe to the interference created by an advertising law that the Supreme Court previously found preempted.

On that basis, the majority concluded that the “nature and degree” of interference caused by General Obligations Law § 5‑601 is “more akin” to the preempted laws.

The Dissent: No Showing of “Significant Interference”

Judge Pérez filed a lengthy dissent, emphasizing that the New York law “merely requires national banks to pay a consumer 2% interest on funds that the consumer has placed in an account with the bank” and arguing that such a requirement does not significantly interfere with national banks’ powers under Barnett Bank and Cantero. She criticized the majority for effectively resurrecting the disapproved “control” test by characterizing the federal power as a broad “flexibility” to set all escrow terms and then treating almost any state limitation on that flexibility as preempted. In her view, the correct Barnett Bank inquiry asks whether the law materially changes banks’ and consumers’ incentives to enter into otherwise mutually beneficial mortgage and escrow transactions. She concluded there was no evidence, and no common‑sense basis, to believe that paying 2% interest on relatively small escrow balances will cause banks to stop offering escrow accounts or mortgages, or to significantly distort other loan terms in ways that would deter consumers. Judge Pérez also read federal statutes such as the Truth in Lending Act (TILA), which affirmatively require interest on certain mandatory escrow accounts “as prescribed by an applicable State or Federal law,” as evidence that Congress did not view modest interest‑on‑escrow requirements as fundamentally inconsistent with national bank powers.

Our Take

The Second Circuit’s remand decision appears to create a circuit conflict over state interest‑on‑escrow laws. The First and Ninth Circuits have both held that similar state escrow‑interest requirements are not preempted. The First Circuit, in particular, engaged seriously with the Supreme Court’s “nuanced comparative analysis” directive in Cantero, yet the Second Circuit expressly rejects its approach, faulting the First Circuit for giving short shrift to the Real Estate Settlement Procedures Act and TILA and for underestimating the “material impact” that a state pricing mandate can have on banking operations. Against that backdrop, Cantero now stands as a clear outlier. In the Second Circuit (New York, Connecticut, Vermont), national banks may treat interest‑on‑escrow statutes as preempted. Whereas, in the First and Ninth Circuits, they may not. That divergence creates real operational tension for multi‑state mortgage lenders and increases the odds that the Supreme Court will be asked to revisit this issue in a future term.