With questions over state preemption laws awaiting a federal court hearing, the Office of the Comptroller of the Currency (OCC) published two proposals on real estate lending powers for national banks. Specifically, the proposals are related to interest payments on funds held in escrow accounts at national banks and federal savings associations.
In its notice requesting stakeholder feedback on the proposed actions, the OCC positioned federal preemption as a critical tool for reducing burdens on financial institutions and driving economic growth.
The first proposal would codify provisions of the National Banking Act related to the authority national banks and federal savings associations have to establish or maintain real estate lending escrow accounts. Additionally, it would codify their right to exercise flexibility in making business judgments regarding the terms and conditions of such accounts, including whether and to what extent to offer any compensation paid to customers or to assess any related fees.
The second proposal would involve the OCC issuing a preemption determination, concluding that federal law preempts state laws that eliminate national banks’ and federal savings associations’ flexibility to decide whether and to what extent to (1) pay interest or other compensation on funds placed in real estate escrow accounts; or (2) assess fees in connection with such accounts.
Notably, the second proposal would single-out New York’s interest-on-escrow law, which was the subject of the Supreme Court’s 9-0 ruling in the case of Cantero v. Bank of America, stipulating that federal law preempts the state law.
The OCC noted that 11 other states have laws with substantively similar escrow terms which are, therefore, also preempted: California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont and Wisconsin.
“Much like New York’s interest-on-escrow law, these state laws (1) require the payment of interest on funds deposited in certain real estate escrow accounts; and (2) in some cases, restrict the assessment of fees in connection with such accounts,” the OCC wrote in the proposal.
State preemption laws are at the heart of a case under consideration in the U.S. Ninth Circuit Court of Appeals, William Kivett, Bernard Bravo, and Lisa Bravo v. Flagstar Bank, which legal experts have acknowledged presents similar preemption questions to those decided in the Cantero ruling.
Trade associations representing national banking institutions filed an amicus brief in support of Flagstar Bank’s stance that federal laws should preempt state laws with respect to escrow accounts, citing California’s price control law as an example of a state law that “significantly interferes” with the exercise of national bank powers, meaning it should be preempted, per the Cantero decision. The brief was submitted jointly by the Bank Policy Institute, the American Bankers Association, the U.S. Chamber of Commerce, the Consumer Bankers Association and the Mortgage Bankers Association.
Comments on both proposals are due 30 days after publication in the Federal Register.