The Supreme Court recently heard arguments on the supremacy of federal banking laws over state laws in a case known as Cantero v. Bank of America. The central issue revolves around whether federal law overrides a New York state law that requires banks to pay interest on mortgage escrow accounts. Bank of America is challenging the New York law, arguing that state laws are preempted by federal law.
The National Bank Act, which was established during the Civil War era, provides that national banks’ powers come exclusively from federal law and are regulated by federal banking authorities. Bank of America asserts that because national banks are created by the federal government, states have no control over them unless permitted by Congress. They argue that the National Bank Act preempts the New York statute and that a national bank’s federal banking powers are ordinarily not limited by contrary state law.
The U.S. Court of Appeals for the 2nd Circuit ruled in favor of Bank of America, stating that the National Bank Act preempts the New York law. However, a 2018 decision by the U.S. Court of Appeals for the 9th Circuit in Lusnak v. Bank of America held that neither the National Bank Act nor OCC regulations preempt a similar California law. This conflicting ruling has led to uncertainty and is now the subject of a petition in Flagstar Bank v. Kivett.
The homeowners who brought suit against Bank of America argue that if federal law preempts state escrow-interest laws, it could jeopardize the regime of laws governing consumer finance and lead to market instability. They believe that the 2nd Circuit’s decision leaves banks uncertain about the interest rates they must pay, undermining the stability of the financial system.
U.S. Solicitor General Elizabeth Prelogar filed a friend-of-the-court brief siding with Bank of America. She argues that since 13 states already have escrow-interest laws in place, there is no pressing need for the Supreme Court to resolve the question presented at this time.
The case was originally brought by three New York residents who purchased homes using mortgages from Bank of America. Despite their mortgage contracts stating that they were to be governed by New York law, the bank refused to pay the 2 percent interest required by state law. The homeowners argue that the question presented in this case is of foundational consequence to the federal banking system and that the 2nd Circuit’s decision could lead to the preemption of any state law seeking to exert control over banking powers.
During oral arguments, Mr. Cantero’s attorney highlighted Section 25b of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which he believes preempts a state consumer financial law only if it significantly interferes with a national bank’s powers. He argues that courts should review the evidence adduced by banks to determine if state laws put them at a disadvantage.
Justice Samuel Alito expressed concern about the practical implications of asking courts to rule on individual statutes, suggesting it could burden the courts and create confusion. Justice Elena Kagan also highlighted the potential for different rules in different states and the lack of comfort in such a scenario.
Bank of America’s attorney emphasized the need for regulatory stability and predictability. They believe that allowing the laws of 50 states to apply to every banking product and service would create uncertainty and undermine a safe and sound banking system.
The Supreme Court is expected to issue a ruling on this case by June, which will shed light on the supremacy of federal banking laws over state laws and its implications for the banking industry and consumer finance regulation.
