On May 30, 2024, the U.S. Supreme Court vacated and remanded a Second Circuit decision holding that a New York law requiring lenders to pay a certain minimum amount of interest on funds held in mortgage escrow accounts is preempted as to national banks. The unanimous decision by the Supreme Court stated that the Circuit Court decision which held that the New York law was preempted for national banks was not "nuanced" enough (see Supreme Court Cantero decision here). Specifically, the Supreme Court held that the Second Circuit failed to analyze whether the New York interest-on-escrow law is preempted by the National Bank Act in a manner consistent with the Dodd-Frank Act ("Dodd-Frank") and Barnett Bank of Marion County NA v. Nelson ("Barnett Bank").
The Supreme Court explained that Dodd-Frank ruled out field preemption. Rather Dodd-Frank dictates that the analysis of whether a state law is preempted is based on a finding that either: (i) the state law discriminates against national banks as compared to state banks; or (ii) the state law prevents or significantly interferes with a national bank exercising their banking powers in accordance with the standards established by the decision in Barnett Bank.
The Supreme Court analyzed the Second Circuit holding as one which read the standard for preemption as unreasonably broad by its ruling that preemption will apply to any state law that purports to "exert control over" a national bank's power. On the basis of that reading, the Second Circuit held that the New York escrow interest law is preempted. However, the Supreme Court concluded that the Circuit Court failed to apply the proper preemption standard in accordance with Dodd-Frank. It held that the New York law does not discriminate against national banks, so preemption did not apply on that basis.
Addressing the Barnett Bank analysis, the Court stated that it requires making "a practical assessment of the nature and degree of the interference" caused by the state law in question. If the state law does not prevent or significantly interfere with the national bank's exercise of its powers, the law is not preempted. The Supreme Court viewed the assessment required by Barnett Bank conducted by the Second Circuit as insufficient to support their decision. Justice Kavanaugh wrote in the opinion that in analyzing the New York interest-on-escrow law at issue in the case, the Court of Appeals did not conduct the kind of nuanced comparative analysis required by Barnett Bank. Instead, he states, "the Court of Appeals relied on a line of cases ... to distill a categorical test that would preempt virtually all state laws that regulate national banks..."
Because the Court of Appeals did not analyze preemption in a manner consistent with Dodd-Frank and Barnett Bank, the Supreme Court vacated the judgment of the Court of Appeals and remanded the case for further proceedings.
As a result, the Second Circuit decision holding that the New York interest-on-escrow law was preempted no longer holds precedential authority. National banks and federal savings associations should take note of this ruling and be on the lookout for further developments.
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