Cantero v. Bank of America, N.A.

Issue: Whether the National Bank Act (NBA) preempts the application of state escrow-interest laws to national banks.

Case Summary: ABA and a group of trades (Amici) filed an amicus brief urging the U.S. Supreme Court to affirm a Second Circuit decision ruling the NBA preempts New York’s Interest on Mortgage Escrow (IOE) law.

In 1996, the U.S. Supreme Court laid the framework of NBA preemption in Barnett Bank of Marion Country, N.A. v. Nelson. In Barnett Bank, the Court ruled a state law is preempted by the NBA if it “prevents or significantly interferes with the exercise by the national bank of its powers.”  In support, the Court cited precedent stating a state law is preempted if it hampers a federal law, interferes with the purposes of a federal law, or obstructs Congress’s objectives. Barnett Bank was the last case in which the Court addressed NBA preemption.

In this case, Alex Cantero, Saul Hymes and Illana Harwayne-Gidansky (collectively borrowers) filed putative class actions, alleging Bank of America (BofA) violated New York’s IOE law by not paying interest on their accounts. BofA moved to dismiss, arguing the NBA preempts New York’s IOE law because it significantly interferes with its federal lending power. The district court disagreed and refused to dismiss the case. On appeal, ABA and a group of trades (collectively ABA), filed an amicus brief supporting BofA. The brief explained mortgage state laws fixing the terms of mortgage escrow accounts constitute a “significant interference” with a national bank’s lending power and is thus preempted by the NBA.

In a 3-0 decision, a Second Circuit panel reversed, ruling the NBA does preempt New York’s IOE law. The Second Circuit analyzed whether the state law “would exert control over a banking power—and thus, if taken to its extreme, threaten to destroy the grant made by the federal government.” In the Second Circuit’s view, “it is the nature of an invasion into a national bank’s 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.” Ultimately, the Second Circuit found that New York’s IOE law would control the exercise of the national bank’s power to create and fund escrow accounts by requiring the bank to pay its customers’ interest. As a result, the Second Circuit concluded the NBA preempts New York’s IOE law.

The Second Circuit’s decision split from the Ninth Circuit. In 2018, the Ninth Circuit ruled in Lusnak v. BofA that the NBA does not preempt California’s IOE law. The Ninth Circuit reasoned the IOE law did not “prevent or significantly interfere” with BofA’s exercise of its national bank powers. The U.S. Supreme Court granted certiorari to settle the circle split on NBA preemption for state IOE laws.

Amici filed its amicus brief supporting BofA’s merits brief, urging the Court to affirm the Second Circuit for several reasons. First, Amici argued mortgage escrow accounts are critical to national banks’ core power to make mortgage loans. In mortgage escrow accounts, borrowers keep sufficient funds to make tax and insurance payments on their property as they become due. The brief underscored OCC’s preemption regulation in 2004 explicitly confirmed that state mortgage escrow account laws are preempted as to national banks.

Second, Amici argued the Second Circuit correctly held that state IOE laws are preempted by federal law because Dodd-Frank’s preemption provision did not alter the NBA preemption standard set out in Barnett Bank. For over 150 years, the Supreme Court has recognized that states “may not curtail or hinder a national bank’s efficient exercise of its powers under the NBA.” In Barnett Bank, the Court synthesized its decisions and articulated the preemption standard consistent with that long line of precedent. In 2010, Congress enacted the Dodd-Frank Act and declared that a state consumer financial law is preempted “only if in accordance with the preemption legal standard in Barnett Bank.” Amici emphasized Dodd-Frank codified the entirety of the preemption analysis described in Barnett Bank. Amici further emphasized the Second Circuit was correct in holding that Dodd-Frank did not change the preexisting legal standard, but rather specifically codified it.

Amici also contended that under the preemption standard in Barnett Bank and Dodd-Frank, a state law is preempted if it prevents the exercise of a core banking power, without the need to analyze the law’s degree of interference. In Barnett Bank, the Court summarized the standard as preempting any State law that “prevents or significantly interferes with a national bank’s exercise of its powers.” Amici explained the Petitioners mischaracterized and misapplied Barnett Bank by proposing a test for the preemption standard. According to the Petitioners, the preemption standard should rely on whether a state law presents a “clear practical obstacle.” Amici emphasized that adopting the Petitioners’ proposed test would cut against Congress’ purpose of codifying the Barnett Bank standard.

Third, Amici argued New York’s IOE Law is preempted under the Barnett Bank standard because it prevents a national bank from exercising its power to determine what interest to pay on escrow accounts. Amici explained that allowing such laws to be enforced against national banks would “open the door to a patchwork of unduly burdensome regulation by the 50 States.” This would deprive national banks of the national uniformity and predictability that are critical to the effective operation of the national banking system. 

Finally, Amici argued the borrowers’ proposed approach to evaluate a state law’s degree of interference with national bank powers is unworkable. In Amici’s view, the borrowers are wrong to argue preemption analysis examines the practical impact of a state law on national banks, and preemption applies only if the law’s degree of interference with national bank powers makes the exercise of those powers “practically infeasible” or creates a “clear practical obstacle.” Amici emphasized this novel standard would force courts to conduct granular and a circumstance-dependent analysis to determine whether a law’s degree of interference meets the undefined standard of “practically infeasible” or “practical obstacle”; lead to different preemption results as applied to different banks at different times; and create uncertainty and confusion for national banks as to which state laws apply to them.