Corporate Accountability

Supreme Court gives New Yorkers second shot in escrow interest-payment fight

WASHINGTON (CN) — The Supreme Court on Thursday gave New York homeowners another shot at forcing Bank of America to pay interest on their escrow accounts.

In a unanimous ruling, the high court found that an appeals court incorrectly threw out a New York law mandating interest on escrow accounts in the face of federal banking regulations. Justice Brett Kavanaugh said the Second Circuit needed to instead thoroughly review how the two laws interacted.

“In analyzing the New York interest-on-escrow law at issue here, the court of appeals did not conduct that kind of nuanced comparative analysis,” the Donald Trump appointee wrote for the court. “Instead, the court of appeals relied on a line of cases going back to McCulloch v. Maryland to distill a categorical test that would preempt virtually all state laws that regulate national banks, at least other than generally applicable state laws such as contract or property laws.”

Three New York homeowners sued Bank of America for skirting a state law that requires lenders to pay at least 2% of the annual interest on homeowners’ escrow accounts. The homeowners deposited funds into their escrow accounts to cover property taxes and home insurance, and states like New York force banks to pay an interest on that money so they aren’t getting an interest-free loan from borrowers.

Bank of America refused to pay the interest fee, claiming the National Banking Act preempts the law. The bank tried to dismiss the lawsuit, but a lower court denied its motion. The Second Circuit then reversed.

At the Supreme Court in February, the homeowners told the justices that finding that the National Banking Act preempts New York’s escrow law would put every similar consumer protection law at risk.

The justices didn’t side with either party, opting instead to provide new instructions for the appeals court before sending the case back.

“We appreciate the desire by both parties for a clearer preemption line one way or the other,” Kavanaugh wrote. “But Congress expressly incorporated Barnett Bank into the U.S. Code.”

The court’s 1996 ruling in Barnett Bank v. Nelson found that a Florida law prohibiting most banks from selling insurance significantly interfered with a federal law authorizing national banks to sell insurance in small towns.

The Dodd-Frank Wall Street Reform and Consumer Protection Act codified the Barnett Bank standard when instructing courts how to decide whether state or federal banking laws should prevail.

Kavanaugh said that under the 2010 law, states could not discriminate against national banks or significantly interfere with their powers. Barrnet Bank was set as the legal standard for deciding if a state law unduly interfered with federal authority.

Kavanaugh said Barnett Bank created a balancing test instead of establishing a clear significant interference line.

“A court applying that Barnett Bank standard must make a practical assessment of the nature and degree of the interference caused by a state law,” Kavanaugh wrote.

If the state law is similar to the regulations examined in Franklin v. New YorkFidelity v. De la Cuesta or Barnett Bank, the state law is preempted, Kavanaugh said. All three cases provide examples of states interfering with federal bank authority.

On the opposite side of the ledger, Kavanaugh offered Anderson v. Luckett, National Bank v. Common Wealth and McCllan v. Chipman as examples of state laws that prevailed over federal regulations.

The ruling instructs the Second Circuit to reconsider where New York’s escrow interest law falls among the court’s precedents to decide if it can be preempted.

Legal experts called the ruling a victory for American consumers, applauding the court’s rejection of a decision that would have made it harder for states to regulate national banks.

“For nearly five decades, New York state law has protected homeowning New Yorkers by requiring mortgage lenders to share the profits earned by interest-generating mortgage escrow accounts,” Smita Ghosh, counsel at the Constitutional Accountability Center, wrote in a statement. “Today, the Supreme Court unanimously rejected a Second Circuit decision that sanctioned Bank of America’s effort to circumvent this law, reiterating the long-established rule that state laws should only be preempted if they significantly interfere with the operations of a national bank.”