U.S. Supreme Court vacates decision on interest for escrow accounts, orders further review

Courts U.S. Supreme Court Escrow Interest Mortgages Second Circuit Appellate

On May 30, the U.S. Supreme Court vacated and remanded for further proceedings a 2022 decision by the Second Circuit that held that the National Bank Act preempted a New York state law requiring the payment of interest on mortgage escrow accounts. The plaintiff borrowers obtained home mortgage loans from a national bank and were required to make monthly deposits into escrow accounts for the payment of property taxes and insurance. New York law required the payment of interest on such accounts. When the national bank, relying on federal preemption, did not pay such interest, the borrowers sued. The district court rejected the bank’s preemption argument, but the 2nd Circuit reversed, holding that the state law significantly interfered with the bank’s exercise of its authorized power to create and fund escrow accounts (covered by InfoBytes here). The Supreme Court granted certiorari to resolve a split between the 2nd Circuit’s decision and an earlier decision of the 9th Circuit (covered by InfoBytes here).

The Supreme Court held that the 2nd Circuit did not properly apply the applicable preemption standard created by the Dodd-Frank Act. The Dodd-Frank Act preempts state law “only if” the state law (i) discriminates against national banks as compared to state banks; or (ii) “prevents or significantly interferes with the exercise by the national bank of its powers,” as determined “in accordance with the legal standard for preemption in the Supreme Court’s decision in Barnett Bank of Marion County, N. A. v. Nelson, Florida Insurance Commissioner, et al.”

Because the state law did not discriminate against national banks, the Court focused its analysis on the Barnett Bank/significant interference test.  The Court held that “Barnett Bank did not purport to establish a clear line to demarcate when a state law ‘significantly interfere[s] with the national bank’s exercise of its powers[,]’” but instead “analyzed the Court’s precedents on that issue.” Stating that those precedents “furnish content to Barnett Bank’s significant interference test—and therefore also to Dodd-Frank’s preemption standard,” the Court then proceeded to analyze those same precedents, identifying cases that illustrate the types of state laws that do and do not constitute a “significant interference” with national bank powers. The Court ultimately concluded that a “court applying [the] Barnett Bank standard must make a practical assessment of the nature and degree of the interference caused by a state law.” In a footnote, the Court added that in “Barnett Bank and each of the earlier precedents, the Court reached its conclusions about the nature and degree of the state laws’ alleged interference with the national banks’ exercise of their powers based on the text and structure of the laws, comparison to other precedents, and common sense.”

Because the 2nd Circuit had not analyzed the preemption issue “in a manner consistent with Dodd-Frank and Barnett Bank,” the Court vacated its decision and remanded the case for further proceedings.