Bank of America, N.A. has filed its merits brief in Cantero v. Bank of America, N.A., the case currently before the U.S. Supreme Court dealing with the scope of national bank preemption.  The petitioners must file their reply brief by February 16, 2024.  (The petitioners’ merits brief is available here.) 

A New York statute requires the payment of interest on mortgage escrow accounts and the question before the Supreme Court is whether the National Bank Act (NBA) preempts application of the New York statute to national banks.  Reversing the district court, the Second Circuit concluded that a state law is preempted if it “would exert control over [a national bank’s] banking power.”   The Second Circuit held that the New York law was preempted as to the named plaintiff whose mortgage pre-dated (and thus did not implicate) Dodd-Frank because the law “exert[ed] control over” a national bank’s power to provide escrow services in connection with home mortgage loans.  It also held that the New York law was preempted as to the two named plaintiffs whose mortgages post-dated Dodd-Frank.  According to the Second Circuit, because Dodd-Frank “codif[ied] the ordinary rules of preemption,” the New York law was preempted under the same analysis as that used for the named plaintiff whose mortgage did not implicate Dodd-Frank. 

In its brief urging the Court to affirm the Second Circuit’s decision, the Bank makes the following principal arguments:

• The New York law is preempted under ordinary preemption principles which provide that the NBA preempts state laws that control the exercise of federally-granted banking powers by attaching state law conditions.  The New York law controls the power of national banks to offer escrow accounts by forcing them to pay interest that federal law does not require and impermissibly conditions the exercise of national bank powers on compliance with state law.  The NBA expressly empowers national banks to engage in real estate lending, i.e. to offer mortgages, and also gives national banks “all incidental powers…necessary to carry on the business of banking.”  Those incidental powers include offering mortgage escrow accounts.  The NBA made national banks’ real estate powers subject to only two limitations: (1) uniform regulations prescribing standards for mortgages issues by federal banking agencies, and (2) any restrictions and requirements the Office of the Comptroller of the Currency (OCC) may prescribe.  When Congress wanted to give states a role over core banking functions like setting interest rates, Congress did so by amending the Truth in Lending Act to mandate the payment of interest on escrow accounts for high-interest-rate mortgages “if prescribed by applicable State or Federal law.”
• The New York law is also preempted under Dodd-Frank.  Dodd-Frank Section 1044 (12 U.S.C. Sec. 25b)  “clarified” that a state consumer financial law is preempted when, “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank…, the State consumer financial law prevents or significantly interferes with the exercise by a national bank of its powers.”  By incorporating “the legal standard for preemption” in Barnett Bank, “Congress presumptively ratified the consensus circa 2010 as to what Barnett Bank meant.” As of 2010, no circuits applied Barnett Bank to require proof that a state law would effectively foreclose national banks from exercising their powers.  Rather, a showing that a state law sought to control federally conferred powers was sufficient under Barnett Bank to find that such state law was preempted by the NBA.
• The “significant interference” standard in Barnett Bank does not require near total impairment of national banks’ powers nor does it require a practical inquiry into the degree to which a state law interferes with national banks’ exercise of their powers.
• The requirement in Dodd-Frank that a preemption determination by the OCC must be made by regulation or order on a case-by-case basis does not mean that a court cannot make a preemption determination without factual proof about the degree of a state law’s impact on a national bank.  Before and after Dodd-Frank, courts apply Barnett Bank to determine preemption.
• A requirement for  a fact intensive inquiry into whether a state law would effectively foreclose a national bank power “would produce intolerable instability as to what state laws are actually preempted, when, and as to which banks.”  Preemption is ordinarily a legal test and “transforming it into a fact-specific inquiry would leave banks and regulators guessing what state laws are preempted.”  States could impose regulations “that strike at the heart of bank powers from mortgage terms to loan fees, so long as those regulations do not practically stop banks from offering a product or service.”  In addition, there would be no guidance for banks and courts “on how much regulation is too much, leaving preemption determinations to shift with market conditions and judges’ economic assessments.”

Oral argument is scheduled for February 27, 2024.  The Justice Department (DOJ) has filed a motion with the Supreme Court seeking leave to participate in the oral argument as amicus curiae and for divided argument.  DOJ filed an amicus brief in support of vacating the Second Circuit’s decision.  In its brief, DOJ argues that the Second Circuit’s conclusion that a state law is preempted if it attempts to “control” a national bank’s exercise of its powers “runs counter to  the ordinary meaning of the term ‘significantly interferes with’; it is inconsistent with Congress’s  evident expectation that preemption determinations will rest on practical degree-of-interference assessments; and it does not account for this Court’s many decisions holding that the NBA did not preempt various state laws regulating national banks’ banking activities.”  In its motion for leave to participate, DOJ states that the petitioners have consented to the motion and agreed to cede ten minutes of their argument time to DOJ.  DOJ also notes that “the United States has previously presented oral argument as amicus curiae in cases concerning the interpretation and application of the Dodd-Frank Act and the NBA,” with Watters v. Wachovia Bank and  Barnett Bank cited as examples.

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