On May 5, the U.S. Court of Appeals for the 2nd Circuit held in a 2-1 decision that the National Bank Act (NBA) preempted a New York law that, as applied to national banks, required mortgage servicers to pay at least 2 percent interest on certain mortgage escrow accounts. The plaintiffs are borrowers who deposited money in mortgage escrow accounts at a national bank. When the bank did not pay the interest required by New York law, the borrowers filed two putative class actions alleging breach of contract and other claims, and the national bank argued in response that it did not need to pay interest because federal banking law preempted the state requirement. As previously covered by InfoBytes, the U.S. Supreme Court vacated the 2nd Circuit’s earlier decision finding the state law preempted (covered by InfoBytes here) and directed it to conduct a “nuanced comparative analysis” of whether the state law “prevents or significantly interferes” with national bank powers under banking preemption precedents.

On remand, the appellate court said the law affected national banks’ power to offer mortgages and set escrow account terms, targeted banks by imposing a fixed minimum interest rate on escrow balances, and was “more akin” to preempted state laws than to generally applicable laws the Supreme Court had upheld. The court also declined to follow the 1st Circuit’s contrary decision in Conti v. Citizens Bank, N.A. with respect to a similar Rhode Island law, deepening a circuit split that also includes the 9th Circuit’s decision in Kivett v. Flagstar Bank, FSB, holding that California’s similar interest-on-escrow law was not preempted.

A dissenting judge, who had joined the court’s initial 2022 preemption decision, wrote that the majority effectively “reimposes the control test” rejected by the Supreme Court and that neither the record nor common sense showed the 2 percent interest requirement would cause banks to stop offering escrow accounts or mortgages, materially change loan terms, or otherwise significantly interfere with national banking powers.