On September 15, 2022, the Second Circuit Court of Appeals issued its decision in Cantero v. Bank of America, N.A. Cantero held that the National Bank Act (NBA) preempted the application to national banks of a New York law requiring home mortgage lenders to pay a minimum rate of interest on mortgage escrow accounts. The Second Circuit declared that New York’s “minimum-interest requirement 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 Second Circuit’s decision is clearly erroneous and should be rejected by the Supreme Court. Cantero creates a direct conflict with the Ninth Circuit Court of Appeals’ decision in Lusnak v. Bank of America, N.A., which upheld a similar California law mandating the payment of a minimum rate of interest on mortgage escrow accounts. Lusnak properly applied the governing preemption standard under the NBA—namely, whether a state consumer financial law “prevents or significantly interferes with the exercise by the national bank of its powers.” The Supreme Court established that standard in Barnett Bank of Marion County, N.A. v. Nelson, and Congress codified that standard in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Second Circuit’s assertion that the NBA preempts any state law that “would exertcontrol over a banking power granted by the federal government” is contrary to the preemption standard established by Barnett Bank and codified by Dodd-Frank. The Second Circuit effectively adopted a per se rule invalidating all state laws that place any limitation on the exercise of any “power” granted to national banks by federal law. The Second Circuit’s approach would result in the preemption of all state laws regulating the exercise of national bank powers, including state regulations that have insignificant effects on the operations of national banks. The Second Circuit’s per se rule contravenes the more narrowly-tailored preemption standard that Congress codified in the Dodd-Frank Act.
The Second Circuit’s view of preemption under the NBA is also contradicted by four key Supreme Court decisions that provided the foundation for Barnett Bank’s preemption standard. In each of those decisions, the Supreme Court upheld a state law that imposed a reasonable, nondiscriminatory limitation on the exercise of a national bank power. The Supreme Court recognized the validity of those four decisions in Barnett Bank and in two subsequent cases—Atherton v. FDIC and Cuomo v. Clearing House Ass’n, L.L.C.
In its recent decision in Brown v. Davenport, the Supreme Court admonished federal courts that they “must follow” the clear mandate of a federal statute and cannot “override a lawful congressional command” by relying on inconsistent language “extracted” from prior Supreme Court opinions. The Second Circuit disregarded that admonition when it refused to follow the plain meaning of the “prevents or significantly interferes” preemption standard codified in the Dodd-Frank Act. The Second Circuit based its per se preemption rule on statements drawn from Supreme Court opinions that were issued many years ago and dealt with federally-chartered institutions that were very different from present-day national banks. The views on preemption expressed in those decisions have been superseded by the preemption standard that the Supreme Court established in Barnett Bank and Congress codified in the Dodd- Frank Act.
GW Paper Series
41 Banking & Financial Services Policy Report No. 11 (Nov. 2022)