The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) have jointly filed an amicus brief in support of the petitioners in the case of Cantero v. Bank of America, currently before the U.S. Supreme Court.
The question in the case is whether the National Bank Act preempts the application of state escrow-interest laws to national banks.
In August 2010, Alex Cantero acquired a residence in Queens Village, New York, through a mortgage extended by Bank of America (BOA). The terms of Cantero's mortgage mandated the establishment of an escrow account for property taxes and insurance premiums, with BOA not providing any interest on these funds. Cantero's mortgage explicitly stated its governance by federal law and the legal provisions applicable to the property's jurisdiction. Allegations were made by Cantero that BOA declined to provide interest on the escrowed funds, contravening New York State law.
The U.S. Court of Appeals for the Second Circuit reversed the District Court ruling, concluding that the National Bank Act does preempt New York’s general obligation law because the minimum-interest requirement would exert control over a banking power granted by the federal government, thereby impermissibly interfering with national banks’ exercise of that power.
The implications of the Cantero case, according to state regulators, raises critical questions about the federal government's ability to preempt state consumer protection laws without proper justification.
“The case is a clear example of federal overreach, which if left unchecked would harm consumers and ignore the high-bar for preemption set by the Supreme Court and enshrined by Congress in Dodd-Frank,” said CSBS Board Chair Lise Kruse, who serves as North Dakota Department of Financial Institutions Commissioner.
Dodd-Frank Act, a comprehensive financial reform legislation, contains language that allows the preemption of state laws only if those state laws "prevent or significantly interfere with" a national bank's powers. The law mandates a case-by-case analysis of such interference and requires consultation with the Consumer Financial Protection Bureau before any state consumer protection laws can be set aside by the Office of the Comptroller of the Currency (OCC). However, the national bank in the Cantero case has advocated for a less restrictive standard, which according to state regulators, would potentially preempt a broad range of state consumer protection laws.
State regulators strongly contest the preemption test utilized by the Second Circuit, which is tied to an outdated and unlawful definition of preemption found in OCC regulations. These OCC regulations diverge from the standards and procedures mandated by Congress in the Dodd-Frank Act and conflict with Supreme Court precedents on preemption of state laws governing financial services.
“State-chartered banks and state-licensed servicers would not receive the preemptive benefit sought by the bank in this case, imposing a cost on many smaller banks and mortgage companies that the largest national banks seek to avoid,” said AARMR President Clifford Charland, director of Non-Depository Operations for the Maryland Office of Financial Regulation.
The Supreme Court's ultimate decision in the Cantero case will be closely watched for its potential implications on the balance of federal and state regulatory authority in the financial sector.
