The Supreme Court considered on Feb. 27 whether federal law overrides a New York state law that compels banks to pay interest on mortgage escrow accounts.
The justices heard oral arguments in the case known as Cantero v. Bank of America.
Bank of America is challenging New York’s escrow interest law. The state statute provides that banks must pay at least 2 percent interest on accounts that contain the extra money that borrowers pay for insurance and property taxes. Thirteen states have similar pro-borrower laws.
Bank of America argues that such state laws are preempted by federal law.
The Civil War-era National Bank Act establishes a system of federally chartered national banks whose banking powers come exclusively from federal law and are extensively regulated by federal banking authorities, primarily the Office of the Comptroller of the Currency (OCC), Bank of America stated in a brief.
Because national banks are created by the federal government, states “can exercise no control” over them, “nor in any wise affect their operation, except in so far as Congress may see proper to permit,” the bank’s brief states, citing Supreme Court precedent.
A national bank’s federal banking powers are thus “not normally limited by, but rather ordinarily preempt … contrary state law,” the brief states, also citing Supreme Court precedent.
In Cantero v. Bank of America, the U.S. Court of Appeals for the 2nd Circuit ruled that the National Bank Act preempts the New York statute. Federal preemption means that a state law that conflicts with federal law is invalid.
That ruling is at loggerheads with a 2018 U.S. Court of Appeals for the 9th Circuit decision in Lusnak v. Bank of America, which held that neither the National Bank Act nor OCC regulations preempt a similar California law.
A subsequent decision from the 9th Circuit that applied the Lusnak decision is now the subject of a petition that the justices are considering in Flagstar Bank v. Kivett. The Supreme Court last considered the petition at the justices’ private conference on Oct. 13, 2023, but took no action. It is unclear when the court will consider the petition again.
The homeowners who brought suit against Bank of America say that if federal law is allowed to preempt state escrow-interest laws here, the regime of laws governing consumer finance could be jeopardized, leading to market instability.
U.S. Solicitor General Elizabeth Prelogar filed a friend-of-the-court brief in August 2023 siding with Bank of America.
The 13 states that have escrow-interest laws have had them “in place for decades … and certain national banks already comply with such laws nationwide,” the brief states. “There is consequently no pressing need for this court to resolve the question presented now.”
The case was originally brought in federal court by three New York residents, including lead petitioner Alex Cantero, who bought homes using mortgages from Bank of America.
Their mortgage contracts, which required them to cover property taxes and insurance payments by putting money in escrow accounts held by the bank, stated that they were to be governed by New York law.
Despite this contractual provision, the bank refused to pay the 2 percent interest required by state law, the homeowners said in their petition.
The homeowners had urged the Supreme Court to take up their case because “the question presented is indisputably important,” so much so that “the banking industry’s chief regulator recently described the question as of ‘foundational consequence to the … federal banking system.’”
They noted that a separate brief filed by the U.S. Chamber of Commerce in the Flagstar Bank case called the issue “critical to the U.S. financial system.”
The homeowners continued, saying that the 2nd Circuit’s decision “to preempt escrow-interest laws leaves banks uncertain of the interest rates they must pay, undermining the stability on which our financial system depends.”
Moreover, the 2nd Circuit’s reasoning could lead to the preemption of any state law “that seeks to exert control over a banking power—no matter how insignificant its impact on banks.”
It could also “allow banks to ignore state consumer-financial regulations with impunity, effectively reinstating the preemption regime that Congress concluded ‘planted the seeds’ for the 2008 financial crisis.”
Mr. Cantero’s attorney, Jonathan E. Taylor, said during oral arguments at the Supreme Court that Section 25b of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 preempts a state consumer financial law only if “it prevents or significantly interferes with the exercise of a national bank’s powers.”
Dodd-Frank permits the OCC or courts to halt the application of any state law that unduly favors state-chartered banks at the expense of nationally chartered banks, Mr. Taylor said.
In the case of nondiscriminatory state laws, courts may review the evidence adduced by banks that such laws would put them at a disadvantage, which is also what takes place in other litigation contesting state laws, he said.
The OCC is also allowed to rule on specific laws, but it cannot override state rules, the lawyer added.
Justice Samuel Alito expressed concern that asking courts to rule on individual statutes would overburden those courts by forcing them to look at evidentiary rules and other factors that would use up a great deal of time.
“It just seems like a complicated situation, but you are able to assess the whole thing. So, just explain why this would not cause practical nightmares,” the justice told U.S. Deputy Solicitor General Malcolm Stewart.
Justice Elena Kagan said having different courts across the country ruling different ways on the same statutes was problematic and could cause confusion.
The justice said she did not have “a whole lot of comfort in this about how peculiar this would be that we could have different rules in different states, we could have different rules depending … on the time that the challenge is brought.”
Bank of America attorney Lisa Blatt said national banks “need to know their regulatory obligations ahead of time.”
“It would create seismic uncertainty if the laws of 50 states could apply to every banking product and service and not just every feature of a mortgage but everything from interest rates on savings and checking accounts to ATM fees to credit card reward programs.
“Congress surely intended a preemption standard that preserves the stability and predictability that undergirds a safe and sound banking system,” Ms. Blatt said.
The Supreme Court is expected to issue a ruling by June.
