Title: Supreme Court Unanimously Rules on Preemption of State Law Regarding Mortgage Escrow Accounts
Introduction:
In a unanimous ruling on May 30, the Supreme Court found that a federal appeals court incorrectly applied the legal standard in a case involving a New York state law requiring banks to pay interest on mortgage escrow accounts. The Court’s decision has significant implications for the regulation of consumer finance and the stability of the market.
Theme 1: The Case and Arguments
The Case:
The lawsuit, Cantero v. Bank of America, was brought by homeowners who purchased homes using mortgages from Bank of America. The mortgage contracts stated that they would be governed by New York law, which required the bank to pay 2 percent interest on escrow accounts.
Bank of America’s Challenge:
Bank of America argued that state laws, such as New York’s escrow interest law, are preempted by federal law. They claimed that the Civil War-era National Bank Act established federally chartered national banks whose operations are not subject to state control.
Homeowners’ Arguments:
The homeowners contended that allowing federal law to preempt state escrow-interest laws could jeopardize the regime of laws governing consumer finance and lead to market instability.
Theme 2: The Supreme Court’s Analysis
The Legal Standard:
Justice Brett Kavanaugh, writing the court’s opinion, highlighted the need for a proper analysis of whether New York’s interest-on-escrow law was consistent with the Dodd-Frank financial reform law and existing precedent. The Dodd-Frank Act incorporated the standard set in Barnett Bank of Marion County v. Nelson (1996).
Preemption Standard:
The standard asks whether a state law “prevents or significantly interferes with the exercise by the national bank of its powers.” Justice Kavanaugh emphasized that Dodd-Frank specified that the National Bank Act preempts a state law only if it discriminates against national banks and significantly interferes with their powers.
Contradictory Rulings:
The Supreme Court’s ruling contradicted the 2018 decision of the U.S. Court of Appeals for the Ninth Circuit in Lusnak v. Bank of America, which held that neither the National Bank Act nor OCC regulations preempted a similar California law. This raises questions about the consistency of preemption standards across different circuits.
Theme 3: Implications and Future Considerations
Market Stability Concerns:
The Supreme Court’s decision has significant implications for consumer finance regulation and market stability. The homeowners argued that invalidating state escrow-interest laws could lead to market instability, highlighting the need for a balanced approach to federal preemption.
Remand and Future Proceedings:
The Supreme Court remanded the case to the Second Circuit, which must now reanalyze whether New York’s law is consistent with the Dodd-Frank preemption standard. The timeline for the Second Circuit’s reconsideration is uncertain.
Conclusion:
The Supreme Court’s unanimous ruling in Cantero v. Bank of America clarifies the legal standard for determining when a state law regulating national banks is preempted by federal law. The decision emphasizes the importance of a proper analysis of consistency with Dodd-Frank and existing precedent. The implications of this ruling on consumer finance regulation and market stability highlight the need for a balanced approach to federal preemption.
