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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 20 September 2024 F E A T U R E S T O R Y CAN THE NATIONAL BANK ACT BE PREEMPTED BY STATE LAW? Attorneys T. Robert Finlay and Kathy Shakibi examine a SCOTUS opinion on whether the National Bank Act preempts a New York State consumer financial law requiring payment of interest on mortgage escrow accounts. B y T. R O B E R T F I N L A Y E S Q . & K A T H Y S H A K I B I E S Q . O n May 30, 2024, the Supreme Court of the United States (SCOTUS) issued its opinion on a matter of far-reaching consequence—whether the National Bank Act preempts a New York State con- sumer financial law requiring payment of interest on mortgage escrow accounts in the case of Cantero v. Bank of Am., N.A., 2024 U.S. LEXIS 2367. The Cantero case arose from New York General Obligations Law §5-601, which requires a minimum 2% interest to be paid on mortgage escrow accounts, maintained for payment of property taxes and insurance. The Second Circuit had decided that the minimum interest requirement would exercise control over a banking power granted by the federal government, so it would impermissibly interfere with national banks' exercise of that power and was thus preempted. SCOTUS vacated the Second Circuit's ruling and remanded with instruction to analyze the preemption under the second prong of Dodd-Frank Act's preemption standard, known as the Barnett Standard. The Dual Banking System " B oth federal and state governments are empowered to charter banks and to regulate the banks holding their respective charters." Lacewell v. OCC, 999 F.3d 130, 135 (2d Cir. 2021). The National Bank Act of 1864, 12 U.S.C. §21 et seq., au- thorizes the federal government to issue bank charters and grants national banks enumerated powers as well as incidental powers necessary to carry on the busi- ness of banking. Among the enumerated powers is the power to "make, arrange, purchase, or sell loans … secured by liens on interests in real estate." National banks have incidental powers to provide escrow services in connection with home mortgage loans. Among Congress's regulation of national banks, the Real Estate Settlement Procedures Act of 1974 (RESPA) regulates how a bank may handle an escrow account in connection with a home mortgage. RESPA does not require that national banks pay interest on escrow accounts. At least 13 states, however, have enacted laws which require payment of interest on mortgage escrow accounts. Thus, there exists an inconsistency or conflict between RESPA and state laws requiring interest on mortgage escrow accounts. Dodd-Frank's Preemption of State Laws F urther among Congress's regulations of national banks, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) defines a state consumer financial law as "… a State law that does not directly or indirectly discriminate against national banks and that directly and specifically regulates the manner, content, or terms and conditions of any financial transac- tion (as may be authorized for national banks to engage in), or any account relat- ed thereto, with respect to a consumer." Dodd-Frank Act also provides the preemption standard for state consumer financial laws as follows: T . R O B E R T F I N L A Y E S Q . is one of the three founding Partners of Wright, Finlay & Zak. Since 1994, Finlay has focused his legal career on consumer finance and mortgage-related litigation, compliance, and regulatory matters. Finlay guides clients through the complexities of litigation while being extremely mindful of their core values and business models. He is a regular speaker on a variety of loan servicing and mortgage banking issues, including key legislative and legal updates. K A T H Y S H A K I B I E S Q . is a Senior Attorney at Wright Finlay & Zak. Shakibi has practiced in the fields of mortgage banking, default services, and foreclosures since 2005. She has represented financial institutions and their service providers in state and federal courts in matters related to mortgage banking and default services. Shakibi was also former house-counsel for a multistate foreclosure trustee and default services firm where she counseled on regulatory, compliance and change-implementation processes. Shakibi has published several articles for industry publications, spoken at industry conferences and presented on-site training.