Biden Agencies Split on State Bank Rules in High Court Showdown

A pending US Supreme Court case focused on a New York mortgage law is exposing a rift within the Biden administration over a federal banking regulator’s power to exempt national banks from state laws.

The case, Cantero v. Bank of America Corp., centers on whether national banks have to comply with a New York law requiring them to pay at least 2% interest on mortgage escrow accounts. The US Court of Appeals for the Second Circuit ruled in 2022 that the National Bank Act, a Civil War-era law governing national banks, exempted Bank of America Corp. from the New York law.

New York is one of 13 states with an interest requirement for mortgage escrow accounts. The US Court of Appeals for the Ninth Circuit ruled in 2018 that Bank of America had to comply with California’s mortgage escrow account interest requirement. The accounts hold money from borrowers to cover property tax and insurance payments and other costs.

The Office of the Comptroller of the Currency, which isn’t a party in the case but will play a central role, has long championed its authority to determine that certain categories of state laws, including escrow account interest mandates, don’t apply to national banks. The agency has also come under criticism, even from fellow federal agencies, for overriding state laws that have stricter borrower protections—as illustrated in the Cantero case.

The Supreme Court’s ruling in Cantero has the potential to limit the OCC’s power, forcing tough questions about the 160-year-old agency’s role in the US regulatory system for banking.

“We need to have a political discussion about, well, what should the OCC do?” said Todd Phillips, a professor at Georgia State University’s Robinson College of Business and a former Federal Deposit Insurance Corp. official.

An OCC spokesperson declined to comment on pending litigation. Briefs supporting Bank of America—and by extension, the OCC—were due Jan. 25; oral arguments are set for Feb. 27.

Longstanding Rift

The Supreme Court has dealt with questions about the applicability of state laws to banks operating with a charter issued by the federal government or another state since McCulloch v. Maryland in 1819.

In that landmark case over the reach of federal powers, the Supreme Court ruled a Maryland tax law didn’t apply to the Second Bank of the United States, which Congress created following the War of 1812.

The 1863 National Bank Act created the OCC, which was granted the authority to charter national banks and exempt them from state laws.

Questions over that preemption power have arisen ever since, Phillips said.

The issue regained prominence after the 2008 financial crisis. Consumer advocates and government watchdogs found the OCC had blocked state consumer protection laws that could’ve prevented some abusive subprime mortgage lending practices that contributed to the foreclosure tsunami.

In response, Congress moved to codify the Supreme Court’s 1996 Barnett Bank of Marion County NA v. Nelson decision in the 2010 Dodd-Frank Act. The court in that case held states could impose their own laws on national banks only if the law doesn’t prevent or “largely interfere” with the bank exercising its powers.

OCC Interpretation

The OCC pushed back with its own rule in 2011 narrowly interpreting Dodd-Frank Section 25b. The rule—which the OCC cited in its brief to the Second Circuit supporting Bank of America—essentially granted the agency broad power to determine that entire categories of laws, such as state requirements for mortgage escrow account interest rates, don’t apply to national banks.

The Obama-era Treasury Department at the time submitted a comment letter saying the OCC’s interpretation was too broad, presaging the agency split today.

Democrats have raised similar concerns with the OCC in recent months.

Lawmakers including Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) wrote to acting Comptroller of the Currency Michael Hsu in December, saying his agency should make state preemption decisions based on a case-by-case, statute-by-statute review of state laws. Democratic attorneys general also sent letters to Hsu and Consumer Financial Protection Bureau Director Rohit Chopra last month saying national banks had stymied their investigations, citing federal preemption.

Solicitor General Elizabeth Prelogar likewise said the OCC made a mistake in its interpretation of the Dodd-Frank preemption provision.

Dodd-Frank called for a “practical assessment of a state law’s effects” rather than a broad determination about classes of state laws, the government led by the Solicitor General said in an amicus brief calling for the Second Circuit’s Cantero decision to be overturned.

The government’s position in Cantero at the Supreme Court “better reflects the text, structure, and history of the statute and this Court’s cases applying the NBA,” the solicitor general said in a footnote, referring to the National Bank Act.

Former Officials Speak

The OCC didn’t file its own brief with the Supreme Court.

But a bipartisan group of former comptrollers and top OCC legal officials said it was the federal government that was misinterpreting Dodd-Frank.

Doing a case-by-case review of state laws would result in chaos, the former OCC officials said in their own brief filed Jan. 25 supporting Bank of America and the OCC. Former Comptrollers John C. Dugan, Eugene Ludwig, and Joseph Otting, and former acting Comptrollers Brian Brooks, Keith Noreika, and John G. Walsh were among those who signed the brief. Walsh led the OCC when the 2011 rule was finished.

“The Department of Justice has, in this case, jettisoned the OCC’s consistent position on the question presented—including the OCC’s position below—in favor of an analysis that is so fact-specific and so granular that the Department of Justice cannot even tell this Court whether the relevant New York statute is preempted,” the former OCC officials said.

No current OCC official signed on to the solicitor general’s brief, a break from past practice, the former officials noted, and underscoring the agency’s disagreement with the Justice Department’s interpretation.

Supreme Court Decides

The Supreme Court will now have the chance to determine which interpretation of the Dodd-Frank preemption provision is correct.

A ruling in favor of the Cantero petitioners, depending on how it’s written, could make it harder for the OCC to make sweeping decisions about when state laws apply to national banks, said Alan Kaplinsky, senior counsel at Ballard Spahr LLP and leader of the firm’s consumer financial services group.

“The opinion, depending upon its holding, may certainly apply to hundreds of situations involving many other types of state laws,” he said.

The OCC’s powers wouldn’t be gone if the petitioners win. The agency could still serve as a buffer for national banks in ways that state regulators and consumer advocates oppose.

But the case-by-case reviews advocated by the rest of the Biden administration would eat up precious time and resources at the national banking regulator.

“The OCC would probably end up preempting fewer laws,” Phillips said.

The case is Cantero v. Bank of America Corp., U.S., No. 22-529.