The Supreme Court to Decide on New York State Law Requiring Banks to Pay Interest on Mortgage Escrow Accounts
The Supreme Court has agreed to consider whether a federal banking law preempts a New York state law that compels banks to pay interest on mortgage escrow accounts.
The case comes at a time of turmoil in the mortgage markets. Mortgage loan borrowing costs soared earlier this month to their highest point in 23 years.
The average rate for 30-year mortgages has risen to 7.57 percent, which is more than double what it was two years ago. This is the highest level since Dec. 1, 2000, when the 30-year mortgage rate was at an average of 7.65 percent. At the same time, applications for home loans have fallen to near multi-decade lows, according to the Mortgage Bankers Association.
The nation’s highest court granted the petition in Cantero v. Bank of America (court file 22-529) on Oct. 13 in an unsigned order. No justices dissented. The court provided no reasons for its decision. At least four of the nine justices had to vote to grant the petition for it to move forward.
Bank of America is challenging New York state’s escrow interest law. The statute provides that banks must pay at least 2 percent interest on accounts that contain the extra money that borrowers pay for insurance and property taxes.
Thirteen states have similar pro-borrower laws.
Bank of America argues that such state laws are preempted by the National Bank Act.
The National Bank Act establishes a system of federally chartered national banks whose banking powers come exclusively from federal law and are extensively regulated by federal banking authorities, primarily the Office of the Comptroller of the Currency (OCC), Bank of America said in a brief filed with the Supreme Court on Feb. 16.
The Supreme Court building in Washington, D.C. (Rudy Sulgan/Getty Images)
Because national banks are created by the federal government, states “can exercise no control” over them, “nor in any wise affect their operation, except in so far as Congress may see proper to permit,” the bank’s brief states, citing Supreme Court precedent.
A national bank’s federal banking powers are thus “not normally limited by, but rather ordinarily preempt … contrary state law,” the brief states, also citing Supreme Court precedent.
In the case at hand, the U.S. Court of Appeals for the 2nd Circuit ruled that the National Bank Act preempts a New York law requiring national banks to pay interest on funds held in mortgage escrow accounts.
The decision is at odds with a 2018 U.S. Court of Appeals for the 9th Circuit decision in Lusnak v. Bank of America N.A., which held that neither the National Bank Act nor OCC regulations preempt a similar California law.
A subsequent decision from that circuit court that applied the Lusnak decision is now the subject of a petition that the justices are considering in Flagstar Bank N.A. v. Kivett (court file 22-349).
Risking Market Instability?
The homeowners who brought suit against Bank of America say that if federal law is allowed to preempt state escrow-interest laws here, the regime of laws governing consumer finance could be jeopardized, leading to market instability.
U.S. Solicitor General Elizabeth Prelogar filed a friend-of-the-court brief on Aug. 30 siding with Bank of America.
The 13 states that have escrow-interest laws have had them “in place for decades … and certain national banks already comply with such laws nationwide,” the brief states. “There is consequently no pressing need for this court to resolve the question presented now.”
The case was originally brought in federal court by three New York residents, including lead petitioner Alex Cantero, who bought homes using mortgages from Bank of America.
Their mortgage contract, which required them to cover property taxes and insurance payments by putting money in escrow accounts held by the bank, stated that it was to be governed by New York law.
Despite this contractual provision, the bank refused to pay the 2 percent interest required by state law, the homeowners said in their petition filed with the Supreme Court on Dec. 5, 2022.
The homeowners urged the Supreme Court to take up their case because “the question presented is indisputably important,” so much so that “the banking industry’s chief regulator recently described the question as of ‘foundational consequence to the … federal banking system.’”
They noted that a separate brief filed by the U.S. Chamber of Commerce in the Flagstar Bank case called the issue “critical to the U.S. financial system.”
2008 Financial Crisis Cited
The homeowners continued, saying that the 2nd Circuit’s decision “to preempt escrow-interest laws leaves banks uncertain of the interest rates they must pay, undermining the stability on which our financial system depends.”
Moreover, the 2nd Circuit’s reasoning could lead to the preemption of any state law “that seeks to exert control over a banking power—no matter how insignificant its impact on banks.”
It could also “allow banks to ignore state consumer-financial regulations with impunity, effectively reinstating the preemption regime that Congress concluded ‘planted the seeds’ for the 2008 financial crisis.”
Mr. Cantero’s attorney, Jonathan Taylor of Gupta Wessler in Washington, told The Epoch Times: “We’re pleased that the Supreme Court agreed to hear our case.”
“We’re looking forward to explaining to the court why state consumer-protection laws aren’t trumped by federal law in this case,” he said by email.
The Epoch Times reached out for comment to the U.S. Department of Justice and the bank’s attorney, Mark W. Mosier of Covington and Burling in Washington, but had not received a reply from either of them as of press time.
Oral arguments in Cantero v. Bank of America have not yet been scheduled.
Tom Ozimek contributed to this article.
How will the court’s decision in Cantero v. Bank of America affect the rights and financial well-being of homeowners?
Ing a New York state law that requires banks to pay interest on mortgage escrow accounts. The case, Cantero v. Bank of America, will be heard by the Supreme Court, which will determine whether the federal banking law preempts this state law.
The timing of this case is significant, as the mortgage markets are undergoing turmoil. Mortgage loan borrowing costs have soared to their highest point in 23 years, with the average rate for 30-year mortgages rising to 7.57 percent. This is more than double what it was two years ago and the highest level since Dec. 1, 2000. At the same time, applications for home loans have fallen to near multi-decade lows.
The case raises important questions about the rights and responsibilities of banks in relation to mortgage escrow accounts. Escrow accounts are used to hold funds for property taxes and insurance premiums, ensuring that these payments are made when due. Under the New York state law, banks are required to pay interest on these accounts, providing additional income for homeowners. However, Bank of America argues that this requirement conflicts with the federal banking law, which does not mandate interest payments on escrow accounts.
The Supreme Court’s decision in this case will have significant implications for both banks and homeowners. If the court upholds the New York state law, it could set a precedent for other states to implement similar requirements. This would potentially increase costs for banks, as they would need to pay interest on a larger number of escrow accounts. On the other hand, homeowners could benefit from this additional income, particularly in a time of rising mortgage costs.
The court’s decision will also clarify the relationship between federal and state laws in the banking sector. It will determine whether state laws can impose additional obligations on banks, even if they conflict with federal laws. This has broader implications for the division of powers between the federal government and individual states in regulating the banking industry.
The Supreme Court’s grant of the petition in Cantero v. Bank of America indicates that the case is of significant interest and importance. The fact that no justices dissented suggests that there is a consensus among the court that this issue warrants consideration. However, the court has not provided any reasons for its decision, leaving room for speculation about the justices’ motivations and potential legal arguments.
Overall, the Supreme Court’s decision on the New York state law requiring banks to pay interest on mortgage escrow accounts will have far-reaching consequences. It will impact the mortgage and banking industries, as well as the rights and financial well-being of homeowners. The outcome of this case will provide clarity on the relationship between federal and state laws in the banking sector and will shape future regulations and practices in this area.
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