By Kris D. Kully, a partner in the Washington, D.C. office of Mayer Brown LLP.

In opining on the scope of express preemption of state laws by the National Bank Act (“NBA”), the Supreme Court determined that Congress did not intend to establish a clear test. Instead, in enacting the relevant provisions of the Dodd-Frank Act of 2010, Congress intended preemption to be analyzed in accordance with the Court’s precedents on the issue dating back to the NBA’s enactment.

The Court’s opinion in Cantero v. Bank of America, N.A.¹ accordingly leaves the scope of NBA preemption subject to a case-by-case analysis of “the text and structure of the laws, comparison to other precedents, and common sense.” While the Court did not address the express preemption of any other federal statutes, it appears the Court’s conclusion in any given case would depend on the circumstances.

Background

Federal NBA and its Preemption

Federal preemption of state law arises from the supremacy clause of the U.S. Constitution. While there is generally a presumption against preemption, in certain circumstances Congress has determined that a national approach is key to serving the public interest by providing uniformity and certainty. In that vein, the NBA provides enumerated and incidental powers to national banks,² and courts and regulators have consistently held that many state laws that interfere with those powers are preempted. In the Dodd-Frank Act of 2010, Congress amended the NBA to confirm the preemption standard for national banks and subsidiaries. The statute now expressly provides that so long as a state consumer financial law does not discriminate against national banks as compared to banks chartered in the state, and no other federal law preempts the state law, the state law is preempted only if it “prevents or significantly interferes with the exercise by the national bank of its powers,” “in accordance with the legal standard for preemption” in Barnett Bank of Marion County, N. A. v. Nelson.³ The statute further provides that any preemption determination may be made by a court or by regulation or order of the Comptroller of the Currency on a case-by-case basis.

State Laws Requiring Interest on Mortgage Escrow Accounts

Residential mortgage loans generally require the borrower to pay amounts periodically into an escrow account, in addition to the borrower’s payments toward the loan’s principal and interest. The mortgage loan servicer generally places those escrow account payments into a bank account and subsequently disburses the amounts as required for the payment of the borrower’s property taxes and insurance obligations.

While federal law does not require those servicers to pay interest to the borrower on the funds held in an escrow account, several states have such interest-on-escrow requirements. For instance, at issue in Cantero, New York law provides that an institution that maintains an escrow account in connection with a residential mortgage loan secured by owner-occupied property in the state must generally credit the account with interest at a rate of at least two percent per year.⁴ The plaintiffs in the underlying case alleged that the defendant, a national bank, was subject to and violated that New York law. The bank argued that the state law is preempted by the NBA.

Lower Court Decisions

The district court in Cantero held that the New York interest-on-escrow statute is not preempted, and the national bank must pay interest on applicable escrow account funds.⁵ The U.S. Court of Appeals for the Second Circuit reversed that decision, holding that the NBA preempts the state statute.⁶ The plaintiffs argued that the New York law did not significantly interfere with the bank’s operations because the amount of interest is minimal. However, the Second Circuit essentially held that it is the nature of an invasion into a national bank’s enumerated or incidental operations—not the magnitude of its effects—that determines whether a state law purports to exercise control over a federally granted banking power and is thus preempted.

To the contrary, the Ninth Circuit has held that national banks must comply with California’s statute requiring the payment of interest on escrow funds.⁷ That court analyzed the magnitude of the state law’s effects and held that it does not prevent or significantly interfere with the bank’s exercise of its powers. These different preemption conclusions applicable to similar state laws force national banks to parse various statutes and case law in different jurisdictions in order to exercise their federal powers, which seems directly at odds with the national scope of the bank charter Congress created in the NBA.

Supreme Court’s Cantero Opinion

In considering the Cantero case, the Supreme Court declined to determine whether the state law is preempted. Instead, it vacated the Second Circuit’s judgment and remanded the case for further proceedings. The Court held that the Dodd-Frank Act and its incorporation of the Court’s opinion in Barnett Bank require a case-by-case analysis of the national bank’s authority to conduct the activity at issue and the nature and degree of the state law’s alleged interference with the exercise of those powers, in comparison with the Court’s precedents cited in its Barnett Bank opinion. The Court held that the Second Circuit did not conduct that “nuanced” analysis but rather attempted to create a clear categorical test that would result in an excessively broad preemption of state laws.

The Court indicated that by enacting the relevant provision in the Dodd-Frank Act, Congress instructed courts to determine whether a state law prevents or significantly interferes with the exercise by the national bank of its powers, and to make that determination with guidance from the examples and holdings of Barnett Bank and the precedents cited therein. If a state law’s interference with national bank powers is “more akin” to the Court’s decisions in favor of preemption, then the state law is preempted, and vice versa.

According to the Cantero Court, the holdings cited in Barnett Bank, and to which future NBA preemption cases must apparently be compared, are as follows:

Preempted – State Laws that Prevented or Significantly Interfered:

• Barnett Bank (1996)⁸ – A state law prohibited most banks from selling insurance, while federal law broadly authorized national banks to sell insurance in small towns.
• Franklin National Bank (1954)⁹ – A state law prohibited most banks from using the word “savings” in their advertising or business, while federal law authorized national banks to “receive savings deposits,” and thus to advertise that fact.
• Fidelity Federal Savings & Loan (1982)¹⁰ – A state law allowed due-on-sale clauses in contracts only when reasonably necessary, while federal law allowed a federal savings and loan to include those clauses at its option.
• First National Bank of San Jose (1923)¹¹ – A state law allowed the state to claim deposits that went unclaimed for more than 20 years but did not require proof that the account was abandoned. (However, see Anderson National Bank, below.)

Not Preempted – State Laws that Did Not Prevent or Significant Interfere:

• Anderson National Bank (1944)¹² – A state law required banks to turn deposits over to the state upon certain proof of abandonment. The Court held that while federal law allows banks to collect deposits, the banks must return the deposits in accordance with state law.
• National Bank (1870)¹³ – A state law imposed a tax on the shareholders of all banks. The Court held that national banks remain subject to certain state laws governing their course of business, and that this law did not pose any greater interference with the bank’s functions than other laws governing businesses.
• McClellan (1896)¹⁴ – A state imposed a generally applicable contract law. The Court held that the state law did not impair the efficiency of national banks or frustrate their purposes.

Potential Implications of Cantero

The Dodd-Frank Act expressly adopted the preemption standard from Barnett Bank. Accordingly, for NBA purposes, a state law that does not discriminate against national banks is preempted only if the law prevents or significantly interferes with the exercise by a national bank of its powers. However, by reiterating that standard and instructing courts to undertake a case-by-case analysis and comparison to precedents, the Supreme Court delays any hoped-for clarity at least until the Second Circuit issues its subsequent decision, which would then of course be appealable back to the Supreme Court.

In sending the case back down,¹⁵ the Supreme Court did not even provide many clues about whether it considers state interest-on-escrow laws to be preempted. However, the Court’s opinion seems to indicate that the express preemption offered by the NBA (and perhaps under other federal regimes) can only truly be resolved by litigation – which is lengthy, costly, and susceptible to different conclusions by different courts regarding similar state requirements.

Notes

1. 602 U.S. ___ (2024).
2. See, e.g., 12 U.S.C. § 371(a), providing that national banks association may make, arrange, purchase or sell mortgage loans subject to 12 U.S.C. § 1828(o) and the regulations or orders of the Comptroller of the Currency.
3. 12 U.S.C. § 25b.
4. N.Y. Gen. Oblig. Law § 5-601.
5. Hymes v. Bank of America, N.A., 408 F. Supp. 3d 171 (E.D.N.Y. 2019).
6. Cantero v. Bank of America, N.A., 49 F.4th 121 (2d Cir. 2022).
7. See, e.g., Lusnak v. Bank of America, N.A., 883 F.3d 1185 (9th Cir. 2018).
8. 517 U.S. 25.
9. 347 U.S. 373.
10. 458 U.S. 141.
11. 262 U.S. 366.
12. 321 U.S. 233.
13. 9 Wall. 353.
14. 164 U.S. 347.
15. On June 10, 2024, the Supreme Court also vacated and remanded a Ninth Circuit case addressing California’s interest-on-escrow law, requiring that court to reconsider based on its instructions in Cantero. See Flagstar Bank v. Kivett, Docket No. 22-349.