The U.S. Supreme Court will hear oral arguments on Feb. 27 to decide whether a New York state law that requires mortgage lenders to pay homeowners interest earned on mortgage escrow accounts should be enforced. That’s according to Supreme Court docket files and reporting from the Consumer Finance Group of Ballard Spahr, a national law firm.
A split circuit court decision on the issue landed the case in front of the Supreme Court. In all, 13 states have passed similar laws requiring mortgage lenders to pay a minimum interest rate on amounts in borrowers’ mortgage escrow accounts. These include: California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, Oregon, Rhode Island, Utah, Vermont and Wisconsin.
New York passed its homeowner protection law in 1974, and lenders have complied with it in the decades since—until now.
Supreme Court decision could ripple beyond mortgage space
The Supreme Court’s ruling in Cantero v. Bank of America could have far-reaching implications outside of mortgage, including multi-state compliance for federally chartered banks, their business partners, vendors and investors, according to analysis from law firm Husch Blackwell.
Bank of America contends that the federal National Banking Act (NBA) preempts state laws. Enacted in 1863 and 1864, the NBA gives national banks power to operate and do business without being controlled by state governments.
Bank of America’s response brief filed on Jan. 18 notes that federal gives national banks the authority to offer mortgages and the “incidental” power to offer escrow accounts to pay homeowners insurance premiums and property taxes.
“Congress, the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB) exhaustively regulate national banks’ federally conferred powers over mortgages, including escrow accounts,” according to Bank of America’s brief. “And Congress and federal regulators have repeatedly declined to require national banks to pay interest on escrow accounts.”
It continues, “OCC has opined that state laws regulating escrow accounts ‘meaningfully interfere with fundamental and substantial elements of the business of national banks.’”
Petitioners gain robust support from consumer advocacy groups
Proponents of the state laws protecting homeowners disagree with Bank of America’s stance.
On Dec. 15, the Constitutional Accountability Center, a nonprofit think tank and law firm, filed an amicus brief in support of the petitioners in opposition to the U.S. Second District Court of Appeals decision siding with Bank of America. The district court’s decision paved the way for the case to go to the high court.
“Under the NBA, the federal government charters, regulates, and supervises national banking associations, which operate alongside state banks,” the CAC’s brief reads.
“While the NBA creates a unique role for federal banking agencies, it has never displaced the states’ control over the banks within their borders, as the Supreme Court has made clear.”
The CAC further maintains in its brief that legal precedent upheld by the Supreme Court makes it clear that state laws “should only be preempted in their application to national banks when they significantly interfere with banks’ performance of public functions.”
Other organizations, including Public Citizen, Consumer Federation of America, National Association of Consumer Advocates, National Consumer Law Center and Public Justice, also submitted briefs in support of the petitioners.