2nd Circuit Again Holds That National Bank Act Preempts NY Interest on Escrow Statute

A panel of the U.S. Court of Appeals for the Second Circuit again held that the National Bank Act (NBA) preempts New York’s interest on escrow statute after the U.S. Supreme Court reversed the panel’s prior decision for applying the wrong legal standard.

In the underlying case, the plaintiffs-borrowers sued their national bank–lender because the national bank did not pay two percent interest on mortgage loan escrow accounts as required by New York statute.  A New York federal court rejected the national bank’s defense that the NBA preempted the New York statute, but the Second Circuit reversed that ruling.

Ultimately, the U.S. Supreme Court held that the Second Circuit applied the wrong legal standard in concluding that the New York statute was preempted.  The NBA provides that a state law is preempted if such state law “significantly interfere[s] with [a] national bank’s exercise of its powers.”  To determine if such significant interference exists, the Supreme Court explained, a court must conduct a “nuanced comparative analysis” of the state law.  Such analysis requires “a practical assessment of the nature and degree of the interference caused by [the] state law.”  WBK covered that opinion here.

Applying this legal standard, the Second Circuit again held that the NBA preempts the New York statute.  In its view, the New York statute “significantly interfere[s] with the national bank’s exercise of its powers” for two principal reasons.  First, the statute implicates a national banking power (the ability to offer mortgage loans).  Second, the statute limits a bank’s general power to define the terms of mortgage escrow accounts, similar to other laws that the Supreme Court has held to be preempted by the NBA.

Accordingly, the Second Circuit reversed the New York federal court’s ruling that the statute was not preempted and remanded the case for further proceedings.  The court’s opinion contrasts with those of the First and Ninth Circuits, which held respectively that similar Rhode Island and California statutes were not preempted.  WBK covered those decisions here and here.