Banks to Bear Heavy Burden in Sizing Up State Law Compliance

The US Supreme Court’s May 30 decision in Cantero v. Bank of America requires national banks reconsider the state laws they comply with and, more importantly, those they choose—at their peril—not to follow.

This decision will significantly erode the ability of national banks to assert that a state law is preempted, making compliance with the law unnecessary. Therefore, national banks will be following existing state laws more than they do today. This decision gives states the ability to promulgate new laws that govern national banks.

The decision provides a framework for how national banks must evaluate whether they are required to comply with a state law.

The question before the court was whether the National Bank Act preempted a New York law that requires banks pay interest on mortgage escrow accounts. Before the appeal to the Supreme Court, the US Court of Appeals for the Second Circuit held the New York law was preempted by the NBA because the New York law exerted control over a national bank’s powers to offer escrow accounts.

The court in this decision interpreted the Dodd-Frank Act of 2010, which specifies a standard for assessing whether a state law is preempted. Specifically, a state law that doesn’t discriminate against a national bank is only preempted if the law “prevents or significantly interferes” with a national bank’s powers. The standard that is required to be used when assessing whether the state law “prevents or significantly interferes” is the standard set in a different US Supreme Court case—Barnett Bank.

The Supreme Court, in a unanimous decision, found the Second Circuit failed to conduct the analysis required by Dodd-Frank and Barnett Bank, and sent the case back to them to apply the correct standard. The Supreme Court rejected the method the Second Circuit used “to distill a categorical test that would preempt virtually all state laws that regulate national banks.”

Barnett Bank requires a facts and circumstances analysis that assess the degree and type of the interference caused by a state law. The analysis must then review the significance of the interference against previous precedents. The Supreme Court referenced a number of cases that could be used in this analysis—some in which a state law was held to be preempted and some in which the state law wasn’t preempted.

While national banks have been following guidance of the Office of the Comptroller of the Currency, which has issued rules asserting that state laws that relate to certain topics are pre-empted, consumer advocates and Democratic lawmakers asserted that the OCC’s guidance has been inconsistent with Dodd-Frank. In December, several Democratic senators sent a letter to the acting comptroller of the currency criticizing the OCC’s approach to preemption, declaring the approach is inconsistent with Dodd-Frank.

The Supreme Court’s decision in Cantero appears to justify views of individuals and groups who have criticized the OCC’s approach to preemption and appears to assert that the type of categorical preemption the OCC favors isn’t permissible.

This decision will result in a large burden for national banks, as they will be required to determine state laws purport to govern their businesses, and whether they believe each state law is preempted based on the fact-intensive process outlined in this case. Without conducting this review, banks potentially expose themselves to lawsuits similar to this one alleging non-compliance with state law.

The case is Cantero v. Bank of America, US, No. 22-529, decided 5/30/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Joseph Schuster is partner in the consumer financial services practice group at Ballard Spahr and was previously a managing director and senior counsel at Goldman Sachs.

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