Cantero v. Bank of America

Issues

Does requiring a national bank to pay interest on escrow accounts attached to its mortgages under New York’s minimum interest-on-escrow law unconstitutionally infringe on the bank’s exercise of its federal power under the National Bank Act?

Oral argument:

February 27, 2024

Court below:

United States Court of Appeals for the Second Circuit

This case asks the Supreme Court to consider to what extent nationally-chartered banks should be shielded from state banking regulations on mortgage escrow accounts. Alex Cantero argues that the Second Circuit’s standard for preemption based on control is improper, and that the Court must evaluate the actual impact the interest-on-escrow law has on bank operations. Bank of America maintains that the state law is preempted because it both impermissibly exerts control over bank operations and also significantly hinders national banks’ exercise of their federally-granted powers. This case has significant implications not only for mortgage escrow accounts but also for states’ capacity to regulate other practices and products of federally-chartered banks.

Questions as Framed for the Court by the Parties

Whether the National Bank Act preempts the application of state escrow-interest laws to national banks.

Facts

The core banking powers of federally chartered banks such as the power to lend come from the National Bank Act (“NBA”). Brief for Respondent, Bank of America at 1. Under the NBA, chartering, regulation, and supervision of national banks are overseen by the Office of Comptroller of the Currency (“OCC”). Brief for Petitioner, Alex Cantero at 6. The differing functions and powers of state-chartered and federally chartered banks have shifted over time, and the divergence between them created what is known as the dual banking system. Id. at 6. Though national banks initially lacked the power to issue real-estate loans, this restriction was removed by Congress in 1913, bringing national banks closer in function to state-chartered banks. Id. at 11-12. Following these reforms, the Supreme Court began finding some state laws applicable to national banks, such as in Anderson National Bank v. Luckett, so long as they did not “impose an undue burden on the performance of the banks’ functions.” Id. However, in other cases, such as in Barnett Bank v. Nelson, the Court still held the NBA to preempt state banking laws. Id. at 13. In 2010, in response to the 2008 financial crisis, Congress clarified the preemption standard under the NBA with 12 U.S.C. § 25(b), which was passed as part of the Dodd-Frank Act. Brief for Respondent at 7. In 2004 and again in 2011, the OCC issued regulations identifying certain state laws, including escrow-account restrictions, as preempted by federal law. Id. at 12.

Under New York state law, banks are required to pay at least 2% interest on mortgage-escrow accounts they maintain. Cantero v. Bank of America, N.A., at 9. In August 2010, Petitioner Alex Cantero purchased a house in Queens Village, New York, and received a home mortgage loan from Respondent Bank of America (“BoA”). Id. In May of 2016, Petitioners Saul Hymes and Illana Harwayne-Gidansky purchased a house in East Setauket, New York, also financed through a mortgage loan from BoA. Id. at 10. Under the terms of both mortgage agreements, the borrowers were required to deposit money in escrow accounts to cover property taxes and insurance premiums. Id. Both mortgage agreements state that they are to be governed in accordance with federal and New York State law; however, both included an attached notice stipulating that due to BoA’s status as a national bank, “no interest will accrue on your escrow account even if your state has a law concerning the payment of interest on escrow accounts.” Brief for Respondent at 13. BoA paid no interest on these escrow accounts. Cantero v. Bank of America, N.A., at 10.

Cantero, as well as Hymes and Harwayne-Gidansky together, sued BoA for breach of contract in federal court in the Eastern District of New York. Brief for Petitioner at 6. The Cantero case and the Hymes case were not formally consolidated, but have proceeded together with both the district and circuit courts issuing single opinions for both cases. Brief in Response to Petition for Certiorari at 10-11. BoA moved to dismiss, arguing that the state law was preempted by federal law; however, the district court denied the motion. Cantero v. Bank of America, N.A. at 2. BoA appealed this denial to the Second Circuit, which reversed the district court ruling and held that the state law was preempted. Id. Cantero and the other plaintiffs petitioned the Supreme Court for certiorari, which was granted on October 13, 2023. Brief for Petitioner at 2.

Analysis

CONGRESSIONAL INTENT ON PREEMPTION OF STATE LAWS REGULATING NATIONAL BANKS

Cantero describes how the Supremacy Clause, which gives priority for federal laws over state laws, requires a specific type of inquiry and does not allow judges to strike down any state laws that are in tension with federal objectives. Brief for Petitioner, Alex Cantero at 28. Cantero contends that the question of whether a state law is contrary to a federal statute amounts to a balance of state and federal interests, and is ultimately a question of Congressional intent. Id. Cantero continues that Congress must have intended to use its authority to set aside state laws when passing a federal statute. Id. Determining Congressional intent, Cantero argues, requires an analysis of the statutory text and structure using traditional tools of interpretation. Id. at 29. Cantero asserts that 12 U.S.C. § 25(b), the statute that clarifies preemption of state laws on national banks, reveals Congressional intent to judge preemption based on the actual effects of the state laws rather than the Second Circuit’s view about hypothetical impacts. Id. at 36. BoA cites Watters v. Wachovia Bank, N.A.’s statement that state laws cannot “curtail or hinder” national banks’ exercise of their powers. Id. at 35. However, Cantero argues that the Court should overrule the Second Circuit because its interpretation departs from the plain meaning of the statute, and thus contradicts Congressional intent. Id.

BoA counters that the NBA gave national banks several vital federal functions, like providing credit for the national economy, and that this banking system is still in place today. Brief for Respondent, Bank of America at 20. Due to these federal functions and the longstanding view that national banks serve as “instrumentalities of the federal government,” the federal government, and by extension Congress, has long held that they are only subject to federal control. Id. at 27. Furthermore, BoA argues, Congress has considered but rejected requiring banks to pay interest on mortgage escrow accounts. Id. at 28. BoA asserts that Congress has specifically chosen how to regulate escrow accounts, and decided to do so by imposing other kinds of protections and sanctions. Id. Because Congress did not condition national banks’ powers upon compliance with state regulations, they intended for those banks to be free of those regulations. Id. BoA asserts that Congress, the OCC, and the Consumer Financial Protection Bureau’s extensive regulation and supervision of national bank escrow accounts, without mandating any interest, also imply that they intend national banks to set their own interest levels. Id.

PROPER STANDARD FOR PREEMPTION

Cantero argues that the Second Circuit’s test for preemption, which was whether state laws hindered national banks’ exercise of any powers in any way by exerting “control” the exercise of those powers, was inaccurate. Brief for Petitioner at 28-29. Cantero argues that the Second Circuit’s emphasis on mere control, without any inquiry into the degree or severity of the hindrance state laws pose to national bank operations, is a flawed reading of 12 U.S.C. § 25b(1)(a). Id. at 29. Cantero explains how § 25b(1)(a) clarifies the standard for preemption as preempting a state consumer financial law “only if” they “prevent or significantly interfere with” national banks’ exercise of their powers. Id. This statute, Cantero claims, incorporates the same standard from Barnett Bank v. Nelson. Id. at 28. Cantero asserts that the Second Circuit’s “control” test ignores the presence of the word “significantly” in the statute and effectively preempts any state consumer financial law, which the statute rejects. Id. at 30. Cantero continues that the statute expressly requires a finding based on “substantial evidence” that a particular state law has a substantial impact on a national bank, which is also incompatible with the Second Circuit’s standard that does not require a factual finding. Id. Cantero argues that BoA places too much emphasis on McCulloch v. Maryland, the foundational 1819 case where the Court ruled that a state could not tax the Bank of the United States because of preemption by federal law and that the control test is outdated law that has been superseded by laws including Dodd-Frank and the NBA. Id. at 44.

BoA counters that the Second Circuit’s “control” test is valid, and that the New York escrow law does exert impermissible control over a national bank’s core powers. Brief for Respondent at 20. BoA argues that Watters, the only case interpreting Barnett, specifies that state laws may exert “no control” over national banks or affect their operation “any wise” except for in ways that Congress explicitly permits. Id. at 21. The “significantly burdens” test is also valid, BoA argues, but states also cannot hinder any exercise of any of the enumerated or incidental powers Congress granted banks in the NBA. Id. BoA argues that Congress must expressly allow a state law to control national bank operations, and that granting banks certain powers impliedly preempts state laws that would affect banks’ exercise of those powers. Id. BoA claims that McCulloch v. Maryland supports the “control” view, because the Court held that states could “in no manner control” national bank operations. Id. at 23. Furthermore, BoA justifies its reliance on McCulloch since Barnett Bank expressly relied on the history of bank regulation and Watters emphasized McCulloch as a foundational case. Id. at 26. BoA counters Cantero’s concern about invalidating virtually all state consumer financial laws by asserting that there is still plenty of room for state laws to regulate banks without impeding their purpose under the NBA. Id. at 25. BoA argues that states are allowed to regulate banking functions in ways that do not impede them, and can also regulate aspects of banking that are not granted to banks as powers in the NBA. Id. at 26.

SHOWING OF SIGNIFICANT IMPACT

Cantero argues that BoA has the burden of making a factual showing of significant impact on national banks’ operations from New York’s escrow interest rate, and that they have not made such a showing. Brief for Petitioner at 31. Furthermore, Cantero asserts that the court can only defer to an OCC determination of preemption if “substantial evidence” supports that finding. Id. at 38. Cantero claims that, since the OCC did not support its finding with factual evidence, the court must make this finding itself. Id. Cantero argues that BoA has failed to produce this evidence and that the Supreme Court must thus reverse the Second Circuit and allow the case to proceed past the motion to dismiss stage. Id. at 31.

BoA states that even if New York is not exerting impermissible control over national banks’ powers, this law still hinders national banks’ operations to such an extent that it qualifies as a significant impact. Brief for Respondent at 21. BoA claims that New York’s Superintendent of Financial Services can choose any interest rate with no upper limit and impose coercive penalties if banks do not comply. Id. at 29-30. The Superintendent can also change this interest rate as frequently as once every three months, creating too much uncertainty for banks. Id. at 30. BoA asserts that eleven other states have their own similar rules, and the OCC confirms that such duplicative, conflicting laws exacerbate the disruptive impact this has on national bank operations. Id. at 31-32. Furthermore, BoA points out, more states could pass their own versions if this law is not preempted, which will be even more burdensome. Id. at 32.

Discussion

BALANCING CONSUMER PROTECTION AND ECONOMIC EFFICIENCY

Public Citizen, in support of Cantero, argues that the preemption regime is critical for protecting consumers in the financial services market. Brief of Amici Curiae Public Citizen et al., in Support of Petitioners at 18. Regarding the New York mortgage-escrow interest statute specifically, Public Citizen argues that it protects borrowers’ financial security by ensuring that they and not the lender receives the interest on their money. Id. at 20-21. The States of New York et al., in support of Cantero, also provides numerous other examples of states effectively intervening to protect consumers from misbehavior by banks, such as Wells Fargo opening millions of unauthorized accounts and Countrywide disproportionately steering racial minorities towards risky subprime loans. Brief of Amici Curiae New York et al., in Support of Petitioners at 10-12. New York et al. further suggests that it was precisely the sort of misbehavior by banks that states police that led to the 2008 financial crisis. Id.

Flagstar Bank, in support of BoA, contends that consumers would bear the brunt of the costs of applying New York’s interest-on-escrow law to federal banks. Brief of Amicus Curiae Flagstar Bank, in Support of Respondents at 15. According to Flagstar, increased costs associated with providing interest on escrow accounts would force federal banks to either charge higher interest rates or extend less credit to borrowers, making it more difficult for consumers to obtain loans. Id. Flagstar adds that federal banks may also struggle to sell mortgage servicing rights as a result, which would also restrict their capacity to extend loans. Id. The United States Chamber of Commerce (“The Chamber of Commerce”), in support of BoA, suggests that the lack of a clear standard would make it difficult for courts to effectively manage the question of how burdensome state regulations are for federal banks. Brief of Amicus Curiae Chamber of Commerce, in Support of Respondents at 15-16. The Chamber of Commerce adds that the messy state-by-state patchwork of differing regulations binding federal banks would impose burdensome litigation costs as banks must intervene to challenge questionable state regulations and to protect their interests across all fifty states. Id. Additionally, the Chamber of Commerce claims allowing state governments to interfere with federal banks’ best practices regarding mortgage escrow accounts in particular would be especially harmful. Id. at 23. The Chamber of Commerce raises that mortgage escrow accounts are convenient for borrowers, protect lenders from defaults, and correlate with reduced risk of foreclosure, decreasing the chance of a wave of foreclosures as was seen in 2008, making these accounts uniquely important. Id.

STATE AND FEDERAL POLICY INTERESTS

The Conference of State Bank Supervisors (“CSBS”), in support of Cantero, contends that preemption of state banking laws creates an unfair advantage for national banks over state-chartered banks, which still are subject to the same rules and regulations as before. Brief of Amicus Curiae Conference of State Bank Supervisors, in Support of Petitioners at 7-8. For example, as the CSBS raises, twelve other states have similar mortgage-escrow minimum interest laws which would now constrain only state-chartered banks. Id. at 8. Public Citizen, in support of Cantero, also warns that preemption could create a regulatory race-to-the-bottom, with states weakening their rules for state-chartered banks so that they may remain competitive with federal banks. Brief of Public Citizen et al. at 21. Indeed, Public Citizen contends that this is already happening, with New York starting to exempt state-chartered banks from the 2% interest rule and adopting a less burdensome regulation. Id. Public Citizen further argues that states are often able to react to problems in the financial sector much faster and much more innovatively than federal authorities can. Id. at 18. Public Citizen observes that states passed laws relatively quickly in response to the rise of foreclosure rescue scams in 2004, while the Federal Trade Commission did not act until 2010. Id. Public Citizen also argues that state regulations can often serve as models for similar action on the federal level. Id. at 19.

The Chamber of Commerce, in support of BoA, counters that the difference in regulation between state and federal banks is in actuality a beneficial feature of the system that will drive innovation and increase competition. Brief of Chamber of Commerce at 9-11. The Chamber of Commerce further warns that allowing states to interfere with national banks’ mortgage accounts will allow states to interfere with national banks in many other ways, undermining the dual banking system that is built on having divergent regulatory regimes for state and federal banks in ways that are contrary to the spirit of the NBA. Id. at 11-12. Finally, the Chamber of Commerce suggests that the already stringent federal banking regulations and established trustworthiness of federal banks eliminate the need for state governments meddling in federal banks, pointing to the 2008 financial crisis as having been disproportionately caused by state-chartered banks. Id. at 13-14.