GW Law Faculty Publications & Other Works

Document Type

Article

Publication Date

2024

Status

Working

Abstract

In Cantero v. Bank of America, N.A., 144 S. Ct. 1290 (2024), the Supreme Court vacated and remanded a decision of the Second Circuit Court of Appeals. Bank of America argued that the National Bank Act (NBA) preempted New York General Obligation Law (NYGOL) § 5-601, thereby exempting the bank from any duty to comply with the New York statute. The Second Circuit agreed with the bank’s preemption claim.

NYGOL § 5-601 requires national banks and other mortgage lenders operating in New York to pay at least 2% annual interest on funds deposited by borrowers in mortgage escrow accounts. The New York statute is a “State consumer financial law” as defined in the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Under Dodd-Frank, a state consumer financial law that does not discriminate against national banks is preempted “only if” that law “prevents or significantly interferes with the exercise by the national bank of its powers.”

The Second Circuit held that the National Bank Act preempted NYGOL § 5-601 because the New York statute “would exert control over a banking power granted by the federal government, so it would impermissibly interfere with national banks’ exercise of that power.” The Supreme Court determined that the Second Circuit’s decision did not conform to “the controlling legal standard” for determining whether § 5-601 is preempted with respect to national banks. The Supreme Court held that the “controlling legal standard” for deciding cases like Cantero is the “prevents or significantly interferes” preemption standard established by the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), and codified by Dodd-Frank in 12 U.S.C. § 25b(b)(1)(B).

The Supreme Court explained in Cantero that “Barnett Bank did not draw a bright line” between state laws that are preempted and those that are not preempted under the “prevents or significantly interferes” standard. A court applying Barnett Bank’s “prevents or significantly interferes” standard must therefore make “a practical assessment of the nature and degree of the interference caused by a state law . . . with the national bank’s exercise of its powers.”

The Supreme Court vacated and remanded the Second Circuit’s decision because the Second Circuit “did not conduct [the] kind of nuanced comparative analysis” required by Barnett Bank’s preemption standard. The Second Circuit erred by adopting a “categorical test,” which “would preempt virtually all state laws that regulate national banks, at least other than generally applicable state laws such as contract or property laws.” The Supreme Court instructed the Second Circuit, on remand, to evaluate the “nature and degree of interference” caused by NYGOL § 5-601 with the “powers” of national banks in a manner that is consistent with the Supreme Court’s assessments of state laws that were preempted, or not preempted, in Barnett Bank and six other Supreme Court decisions identified in Cantero.

Part 1 of this Policy Brief discusses NYGOL § 5-601’s relatively minor economic and financial impact on national banks. Parts 2 through 4 review the Supreme Court’s analysis of the economic, financial, and competitive effects of the state laws that were challenged in Barnett Bank and six other Supreme Court decisions identified in Cantero. As shown in Part 5, the New York statute’s interference with national bank powers is much less significant than the interference caused by the state laws that were challenged in those seven key decisions, including three state laws that were upheld against preemption claims. Accordingly, on remand the Second Circuit should uphold the validity of NYGOL § 5-601 because that statute does not prevent or significantly interfere with the exercise of national bank powers.

As explained in Part 6, the Second Circuit should also reject two additional preemption arguments that Bank of America might advance on remand. As shown in Part 7, the First and Ninth Circuit Courts of Appeal should uphold similar interest-on-escrow laws enacted by Rhode Island and California, which have been challenged in two other pending cases.

GW Paper Series

2024-53

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