More than a year after the U.S. Supreme Court’s unanimous decision vacating and remanding an appellate court’s finding in Cantero v. Bank of America, the U.S. First Circuit Court of Appeals issued a new ruling upholding a key preemption standard codified in the Dodd-Frank Act.
The case involved home mortgage loans obtained from Bank of America with contracts requiring the borrowers to make monthly deposits into escrow accounts. New York state law requires banks to pay a minimum of 2 percent interest on balances held in borrowers’ escrow accounts.
Bank of America refused to pay this interest, arguing the National Banking Act (NBA) and other federal laws preempted any state law related to how the bank serviced these accounts and therefore it was not required to adhere to the state statute.
This raised a pivotal question for the courts to answer. The Supreme Court previously attempted to do so in the case of Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner in 1996, ruling state law is preempted where it “prevents or significantly interferes” with the national bank’s exercise of its powers. Congress codified this in Dodd-Frank as a standard for preempting state consumer financial laws.
On Sept. 15, 2022, the Second Circuit ruled 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.”
This decision was invalidated by the Supreme Court on May 30, 2024, and remanded to the First Circuit, which found the Second Circuit failed to conduct the type of “nuanced comparative” preemption analysis necessary under Barnett when making its determination. Such an analysis entails “a practical assessment of the nature and degree of the interference caused by a state law” to test whether the state law in question “significantly interferes” with the national bank’s operations.
Art Wilmarth, professor emeritus of law at George Washington University Law School, analyzed the case in a 2022 article published in the Banking & Financial Services Policy Report.
“The Second Circuit’s view of preemption would effectively create 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,” Wilmarth wrote. “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 chose to codify in the Dodd-Frank Act.”
Wilmarth noted the per se rule was also contradicted by four foundational Supreme Court decisions underpinning the Barnett preemption standard.
Attorney David Friend, owner of Friend Mortgage Consulting, referenced Wilmarth’s contention while explaining to Dodd Frank Update why he believes the First Circuit made the right call.
“The standard to test preemption is whether it ‘prevents or significantly interferes’ with the operation of national banking associations,” Friend said. “Congress was explicit with the rejection of the per se preemption standard. It’s now a factual argument and will hinge on questions of whether state laws requiring the payment of interest on escrow accounts for taxes and insurance meet that standard. Future cases on preemption will need to meet that standard, rather than rely on per se preemption, as Congress decided in Dodd-Frank.”
With other courts facing similar preemption questions in other cases, Husch Blackwell Partner Susan Seaman told Dodd Frank Update there is still plenty of room for divergent legal interpretations. However, the rulings by the Supreme Court and now the First Circuit have at least provided some critical beacons for guiding such determinations.
“After the Supreme Court’s ruling said there is no categorical black-and-white preemption standard,” Seaman said. “But then they did give the courts a line of cases where they found preemption, and said here’s the line of cases where we did not. But the open question towards Cantero was: How are different courts addressing different preemption questions going to build out those navigational buoys going forward?”
Seaman views the First Circuit’s ruling as a first step in the process of creating a more solid foundation for addressing preemption questions.
“I think with the First Circuit case, you’re starting to see the courts purely applying those navigational buoys based on preemption rulings on this side and that side and figuring out where is the line. What types of things are we going to find preempted or not? And I think by doing that they started to kind of fill in those gaps that the Supreme Court kind of left with Cantero for lower courts to decide,” she said.
She noted the Ninth Circuit’s mortgage escrow preemption case, Kivett v. Flagstar Bank, which the Supreme Court remanded back to the appellate court after the Cantero ruling. The Ninth Circuit then applied the Supreme Court’s preemption interpretation in reaffirming its prior finding that California’s interest-on-escrow law is not preempted by the NBA.
The question still remains, however, whether other courts will follow suit in applying the high court’s logic to other pending cases involving preemption.
“There’s always the question of will those courts kind of fall in line in a similar analysis and read the case law the same way, or will they do something different?” Seaman said. “And if they do something different, then we have to consider not only what the state law says but where it sits within the court system to know how it’s interpreted. So I think there is still a lot to be filled in.”
The First Circuit also ruled on the preemption question in the case of Conti v. Citizens Bank, granting Citizens Bank’s motion to dismiss a case on the grounds that the NBA preempted a Rhode Island statute. Similar to Cantero, this case also pertained to a law requiring all banks operating within the state to pay mortgage borrowers interest on the funds deposited into their mortgage escrow accounts.
With the benefit of the rulings by the Supreme Court and the First Circuit, the Conti case has been remanded to the U.S. District Court for the District of Rhode Island for reconsideration. The court’s subsequent determination on remand will be telling in the ongoing task of drawing clearer preemption standards in the bigger picture.