Banks, OCC Face Litigation Headaches After Supreme Court Ruling

National banks will have to contend with more litigation to assess whether state consumer protection laws apply to them after a US Supreme Court unanimous decision on Thursday.

The high court’s ruling in Cantero v. Bank of America NA reignites a fight over bank regulation that dates back to the 19th century and featured prominently in the 2008 financial crisis: Did the 2010 Dodd-Frank Act narrow the National Bank Act’s power to override state laws?

In a decision authored by Justice Brett Kavanaugh, the Supreme Court found the US Court of Appeals for the Second Circuit didn’t properly review case law in determining that New York’s policy, which requires banks to pay interest on mortgage escrow accounts, is preempted by the National Bank Act.

Courts will now have to determine whether national banks are free to ignore state laws on a statute-by-statute basis, rather than quickly dispatching cases by declaring state laws are preempted.

The decision has implications for the Office of the Comptroller of the Currency, the federal regulator overseeing national banks. The OCC now will find it more difficult to declare whole categories of state laws preempted, said Todd Phillips, a professor at Georgia State University’s Robinson College of Business and a former attorney at the Federal Deposit Insurance Corp.

“This is going to be a big mess” for the OCC, Phillips said. “And it’s going to be a big mess for national banks. But it will be a benefit for consumer protection.”

Earlier: Biden Agencies Split on State Bank Rules in High Court Showdown

Preemption Clash

At issue in the Cantero case is whether Bank of America Corp. and other national banks have to abide by New York’s requirement that they pay interest on mortgage escrow accounts.

Bank of America and the OCC argued throughout the litigation, including at the Second Circuit, that the National Bank Act, a Civil War-era statute that created the national bank regulator, meant national banks were exempt from state consumer protection laws.

Around a dozen other states have laws similar to New York’s on the books. In 2018, the US Court of Appeals for the Ninth Circuit ruled that California’s version wasn’t preempted by federal law.

But the Second Circuit disagreed. State laws don’t apply to national banks, the appeals panel ruled, citing a long line of cases stretching back to the Supreme Court’s 1819 McCulloch v. Maryland decision holding that a Maryland tax law didn’t apply to the Second Bank of the United States.

The Supreme Court on Thursday said the Second Circuit made the wrong analysis.

The appeals court should’ve followed a provision in Dodd-Frank stipulating that federal law can preempt a state consumer protection law only if it “significantly interferes” in a national bank’s operations.

The Dodd-Frank provision codified the Supreme Court’s 1996 decision in Barnett Bank of Marion County NA v. Nelson and was intended to curtail OCC preemption powers following the 2008 financial meltdown. Critics say the OCC’s use of its preemption authority contributed to the wave of foreclosures that spurred the crisis.

“In analyzing the New York interest-on-escrow law at issue here, the Court of Appeals did not conduct that kind of nuanced comparative analysis,” Kavanaugh wrote.

See also: Chief of State Bank Regulators Wants Equality With US Agencies

Narrow Ruling

Consumer advocates were concerned the Supreme Court could’ve set a bright-line rule essentially stating that state consumer protection laws can never apply to national banks. That didn’t happen.

But the high court also didn’t establish a firm rule to determine when state laws do apply to national banks, setting up the potential for lawsuits across the country.

“The Court had an opportunity with this case to articulate a new preemption standard but declined to do so in favor of reaffirming its own precedents,” said Erin Bryan, the co-chair of Dorsey & Whitney LLP’s consumer financial services group.

The news isn’t all bad for banks, said Dori K. Bailey, the chair of the financial institutions regulatory practice at Bond, Schoeneck & King PLLC.

“If the lower courts follow the Barnett Bank standard, the overall effect of the Cantero decision on national bank preemption will likely be minimal,” said Bailey, who also teaches banking law at Syracuse University. “Although the Court did not provide a bright line rule, neither did Barnett Bank or Congress when it incorporated the Barnett Bank legal standard into the Dodd-Frank Act.”

The court instructed the Second Circuit to consider the significance of a 2011 preemption rule from the OCC, as well as the Dodd-Frank provision seeking to limit preemption.

State regulators, for their part, are pushing the OCC to change its position after Thursday’s ruling to ensure it complies with the Dodd-Frank restrictions.

“These mandates have been ignored for over a decade, and current OCC rules fail to meet the high preemption bar reaffirmed today,” Conference of State Bank Supervisors President and CEO Brandon Milhorn said in a statement.

An OCC spokesperson declined to comment.

Biden Administration Rift

The Supreme Court’s ruling largely follows a position laid out by Solicitor General Elizabeth Prelogar in the government’s amicus brief in the case. That brief was especially notable because it pitted the Justice Department against the OCC.

The OCC under acting Comptroller Michael Hsu hasn’t frequently wielded its preemption powers, so the Supreme Court’s decision is unlikely to have an immediate impact on the agency.

But a future comptroller seeking to squash state laws as they pertain to national banks may face challenges.

“It may become a bigger deal over time as some of these fights play out,” said Keith Noreika, a former acting comptroller of the currency during the Trump administration and now the chairman of Patomak Global Partners’ banking supervision & regulation group.

The OCC will likely have to challenge individual state laws on a case-by-case basis, he added.

That’s the outcome Congress sought when writing Dodd-Frank, said Graham Steele, the former assistant Treasury secretary for financial institutions in the Biden administration.

“We’re getting towards kind of what the law was intending, which was a law-by-law analysis into how much of an impediment a state law is to the operations of a national bank,” he said.

Gupta Wessler LLP represented the petitioners. Covington & Burling LLP represented Bank of America.

The case is Cantero v. Bank of America NA, U.S., No. 22-529, 5/30/24.