In 1974, the State of New York enacted a law meant to protect homeowning New Yorkers by requiring mortgage lenders to share the profits earned by interest-generating mortgage escrow accounts.

For more than four decades, lenders complied with this law. But Bank of America now argues that this important protection for New York homeowners is preempted by the federal National Banking Act (NBA).  A federal district court in New York rejected this argument, but on September 15, 2022, the U.S. Court of Appeals for the Second Circuit accepted it, concluding that the NBA preempts the application of New York state’s escrow interest law to national banks because, in its view, enforcement of the law would control the bank’s exercise of its powers.

On December 15, 2023, CAC submitted an amicus brief to the Supreme Court explaining why this approach is wrong.  Our brief made three main points.

First, states have actively regulated banks and lending since this nation’s Founding.  The NBA does not change this.  Under the NBA, the federal government charters, regulates, and supervises national banking associations, which operate alongside state banks. While the NBA creates a unique role for federal banking agencies, it has never displaced the states’ control over the banks within their borders, as the Supreme Court has made clear.  Instead, since the NBA’s passage in 1863, states have enforced their banking-related laws against national banks. The dual-banking system—in which both federal and state governments charter and regulate banks—is viewed as promoting core national values of competition, federalism, and freedom of choice.

Second, Supreme Court precedent supports this conclusion.  In a line of precedent almost as old as the NBA itself, the Court has instructed that state laws should only be preempted in their application to national banks when they significantly interfere with banks’ performance of public functions.

Third, the 1819 Supreme Court case McCulloch v. Maryland does not compel a different result.  In that case, the Court held that the Second Bank of the United States was immune from state taxes.  While the Court observed that the power to tax or “control” the Second Bank involved the power to “destroy” it, the Court did not conclude that federal banking laws preempt any state law purporting to “control” a national bank’s exercise of a federal power.  Indeed, that case turned on the Supreme Court’s determination—however implicit—that the state tax at issue would actually hinder the Second Bank’s ability to serve the government.  The Second Circuit, by contrast, declined to evaluate the impact of New York’s escrow interest law entirely.  In addition, the Second Circuit failed to recognize key differences between the Second Bank in McCulloch and national banks today.

In sum, the dual-banking system has deep roots in our country’s history and state lawmakers have regulated banks, including national banks, for centuries.  The Second Circuit’s decision in this case failed to engage with this history and misread over a century of the Supreme Court’s precedent.  It should be reversed.

In May 2024, the Supreme Court unanimously ruled in favor of the petitioners, vacating the lower court’s judgment and remanding the case for further proceedings. The Court held that the Second Circuit had not appropriately assessed whether the state law “prevents or significantly interferes with” national banks’ performance of public functions. By blocking an attempt to limit the power of states to regulate national banks, this decision was a win for America’s consumers.