On February 27, 2024, the U.S. Supreme Court is set to hear oral arguments in the National Bank Act (“NBA”) preemption case. The question before the Supreme Court is whether the NBA preempts the application of state escrow interest laws to national banks.
The case comes before the Supreme Court after a consumer’s petition for certiorari was granted in October 2023. The Supreme Court was asked to review a ruling by the Second Circuit which found that national banks are preempted from a New York escrow interest law that requires lenders to pay 2% interest to mortgage escrow accounts. New York General Obligations Law § 5-601. In a 3-0 decision, a Second Circuit panel reversed a lower court after assessing whether the state law “would exert control over a banking power – and thus, if taken to its extreme, threaten to destroy the grant made by the federal government.” The Second Circuit found that the state law would control the exercise of the national bank’s power to create and fund escrow accounts by requiring the bank to pay interest and concluded that the NBA preempts the state law.
The Second Circuit’s decision split from a 2018 Ninth Circuit ruling which looked at a similar consumer protection case and ruled that the NBA did not preempt a California mortgage escrow interest law. The Ninth Circuit reasoned that the state law did not “prevent or significantly interfere” with the bank’s exercise of its national bank powers. At the time, the Supreme Court declined to review the Ninth Circuit’s decision.
The last case in which the Supreme Court addressed the NBA preemption was Barnett Bank of Marion County, N.A. v. Nelson. In the 1996 case, the Supreme Court cited precedent stating that a state law is preempted if it hampers a federal law, interferes with the purpose of a federal law, or stands as an obstacle to Congress’s objectives. The ruling found that a state law is preempted by the NBA if it “prevents or significantly interferes with the exercise by the national bank of its powers.” In 2010, Congress included this standard in the Dodd-Frank Wall Street Reform and Consumer Protection Act under 12 U.S.C § 258b(b)(1)(B).
The Supreme Court’s decision could eventually affect other express preemption provisions in federal law. We will continue to monitor developments and advise on any significant updates in this case.