On September 22, the U.S. Court of Appeals for the 1st Circuit vacated a district court’s dismissal of a class action lawsuit alleging a national bank failed to pay interest on mortgage escrow accounts as required by Rhode Island law. The plaintiff, a mortgage borrower, alleged that the bank’s failure to pay interest violated Rhode Island law requiring banks pay interest on escrow funds at a rate no less than the prevailing market rate for savings accounts.

The district court found the National Bank Act preempted the Rhode Island statute, but the 1st Circuit vacated, noting the lower court did not apply the preemption analysis clarified by a 2024 U.S. Supreme Court decision (covered by InfoBytes here). The 1st Circuit explained that courts must conduct a “practical assessment of the nature and degree of the interference” caused by a state law by performing a “nuanced comparative analysis” of Supreme Court preemption precedents, rather than categorically preempting any state law that regulates national banks.

Upon review, the court found no express conflict between the statute at issue and the National Bank Act. Accordingly, the court rejected the bank’s arguments for categorical preemption, the “patchwork” theory, and noted that Congress had not expressed any intent to preempt state laws like the Rhode Island one at issue. The court concluded that the bank had not met its burden to show that the Rhode Island statute was preempted and remanded the case for further proceedings consistent with the Supreme Court’s ruling.