1st Circuit Finds No Federal Preemption of State Mortgage Escrow Requirements

On September 22, 2025, the U.S. Court of Appeals for the First Circuit found that claims brought on behalf of a putative class of mortgage borrowers alleging that their mortgage lender, a national bank, failed to adhere to mortgage-escrow account requirements contained in state statutes, were not barred by federal preemption under the National Bank Act (NBA).

As background, the district court dismissed the plaintiff’s claims on the basis of federal preemption under the NBA, and the plaintiff appealed.  The First Circuit stayed consideration of the appeal while the Supreme Court considered a similar case out of the Second Circuit, in which another class of mortgage borrowers alleged that they failed to receive the state-mandated interest on their mortgage escrow accounts from another large national bank.  The Supreme Court issued a unanimous decision declining to create a test to determine whether the NBA preempts state laws, and requiring courts to conduct a “nuanced comparative analysis,” including “a practical assessment of the nature and degree of the interference caused by state law.”

In his appellate brief, the plaintiff argued that the district court failed to apply the proper test for preemption, as outlined by the Supreme Court, and defendants failed to show that the state statute significantly interferes with federal-banking power such that preemption is proper under the NBA.  The First Circuit agreed, and held that the plaintiff’s claims should be allowed to proceed because the bank failed to show that the state law was preempted where it: (1) is banking-specific; (2) has no express conflict with the NBA; (3) does not conflict with the overall federal banking scheme; and (4) will not have practical implications that significantly interfere with the bank’s exercise of its federal banking powers. 

The First Circuit therefore vacated the district court’s dismissal and remanded the case for further proceedings.