On May 30, the Supreme Court issued its opinion in Cantero v. Bank of America, N.A., in which the Court was set to decide whether national banks must comply with state interest-on-escrow laws (and by extension, certain other state laws). Rather than providing a clear preemption standard, the Court sent the issue back to the Second Circuit with instructions to conduct a “nuanced comparative analysis” of prior opinions to determine how those laws stack up in terms of interference with banks’ powers.

The Cantero case relates specifically to whether Bank of America, a national bank, must comply with New York law requiring a person maintaining an escrow account to credit the account with interest at a rate of 2%. The Bank argued that the National Bank Act preempts such state law requirements, and the Second Circuit agreed. The Second Circuit held that the preemption determination does not turn on how much a state law impacts a national bank, but rather whether it purports to “control” the bank’s exercise of its powers. In the court of appeals’ view, it is the nature of an invasion into a national bank’s enumerated or incidental 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. The Second Circuit essentially held that preemption is relatively broad – that the enumerated and incidental powers of national banks must not be hampered by state laws.

On the other hand, the Ninth Circuit has held that Bank of America, and of course other national banks, must comply with California’s statute requiring the payment of interest on escrow funds – that the state statute is not preempted. In 2018, the Ninth Circuit held (in Lusnak v. Bank of America) that the state law does not “prevent or significantly interfere with [the bank’s] exercise of its powers.” The Ninth Circuit focused on the magnitude of the state law’s effects, essentially holding that preemption is relatively narrow.

In resolving this conflict between the circuit courts, Justice Kavanaugh (writing for a unanimous Court) reinforced the Dodd-Frank Act and its incorporation of the Court’s opinion in Barnett Bank of Marion County, N.A. v. Nelson. The Act provides that a state consumer financial law is preempted only if the law discriminates against national banks, or prevents or significantly interferes with the exercise by a national bank of its powers, and expressly ties that standard to the opinion in Barnett Bank.

The Court’s Cantero opinion does not cite the rest of that statute, which provides that any such preemption determination may be made “by a court, or by regulation or order of the Comptroller of the Currency [OCC] on a case-by-case basis, in accordance with applicable law.” The OCC’s regulations provide that a national bank may make real estate loans without regard to state law limitations concerning, among other issues, “escrow accounts.” While those regulations predate the Dodd-Frank Act, the Court does not address whether Congress intended, by expressly mentioning those regulations, to incorporate that preemption into the Barnett Bank analysis. The Court notes only that the Second Circuit did not address the regulations’ significance, “if any.”

While that standard – prevent or significantly interfere with bank powers – seems open to interpretation (and in fact has led to different interpretations, as evidenced by the split between the Second and Ninth Circuits), Justice Kavanaugh makes the analysis seem crystal clear. One must simply consider the interference with bank powers caused by the state laws analyzed in Barnett Bank and the Supreme Court precedents it discusses (some of which date back to 1870), and determine whether the nature and degree of interference caused by the state law at issue is “more akin” to those that were deemed preempted or to those that were deemed not preempted. The opinion also urges us to use common sense. In the end, the Court remanded the case to the Second Circuit to undertake that analysis.

One could expect that upon undertaking that analysis as the Court instructs, the Second Circuit may come to the same substantive conclusion – that New York’s interest-on-escrow requirement is preempted for national banks. One could also guess that the Ninth Circuit may, if it were asked or required to undertake its analysis anew, come to its same conclusion that California’s similar interest-on-escrow requirement is not preempted. Inconsistent preemption results for substantially similar laws in different states cuts against the rationale for preempting certain state laws for national banks in the first place.

Looking beyond state laws on mortgage escrow accounts, the Court’s Cantero opinion will appear to require nuanced comparisons of the impact of all sorts of state laws with age-old precedents, and expert testimony on the degree and magnitude of the laws’ effects on banks’ exercise of enumerated and incidental powers. Unfortunately, the result of the Court’s opinion may be less straight-forward than Justice Kavanaugh makes it sound. In a sense, we are back where we started, without bright lines for determining whether national banks must comply with an endless assortment of state laws.

A recipe for continued litigation – and we still do not know whether national banks must pay interest on mortgage escrow accounts in New York.

For additional information on the Court’s decision, see Mayer Brown’s Supreme Court & Appellate Practice page.