9th Circuit Rules That National Banking Act Does Not Preempt California Escrow Interest Requirement

A Ninth Circuit panel recently ruled that the National Bank Act does not preempt California’s state escrow interest law.  The panel reversed a district court’s dismissal of a putative class action, which was filed against a large national bank for allegedly failing to pay interest on customers’ escrow account funds, in violation of both federal law and a California state escrow interest law, which requires financial institutions to pay borrowers at least two percent annual interest on the funds held in their escrow accounts.

The Ninth Circuit reversed the district court’s ruling, holding that the National Banking Act did not preempt California’s escrow interest law.  The panel wrote that Dodd-Frank merely codified the existing case law standard as to NBA preemption—stated by the U.S. Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson—which held that states may moderate national banks if doing so does not prevent or largely interfere with the national bank’s ability to exercise its powers.  The panel found that the escrow interest law neither prevented nor significantly interfered with the national bank’s exercise of its powers.

Further, the Ninth Circuit gave no credence to the bank’s reliance on a 2004 preemption regulation, issued by the OCC, which was widely believed to have presented a broader standard than Barnett Bank.  The panel wrote that the OCC regulation deserved little, if any, deference in light of Barnett Bank and the enactment of Dodd-Frank: therefore, the standard articulated by that case and statute controlled.  In further support of its point, the panel referenced a Dodd-Frank provision that amended the Truth in Lending Act, which stated that banks are required to pay interest on escrow account balances “if prescribed by applicable state law.”  The panel wrote that the inclusion of this language in Dodd-Frank showed that Congress did not believe that state escrow interest laws would “prevent or significantly interfere” with a national bank’s operations.

Accordingly, the Ninth Circuit reversed the district court’s decision and allowed the plaintiff to proceed on his breach of contract and California Unfair Competition Law claims.

The case, Lusnak v. Bank of America, N.A., is accessible here.