9th Circuit Upholds California Interest-on-Escrow Law Under SCOTUS’s New Bank Preemption Standard

The Ninth Circuit affirmed a decision finding that California’s interest-on-escrow law was not preempted by the National Bank Act under the bank preemption legal standard set forth in a recent Supreme Court decision.

Several states, including California, have laws which require banks to pay interest on funds held in escrow accounts.  A class of California borrowers who had mortgage escrow accounts with a large national bank sued the bank for failing to pay the required interest.  The bank asserted that this state law was preempted by the National Bank Act.  The district court and the Ninth Circuit had previously agreed that the California law was not preempted, but those opinions were vacated after the Supreme Court issued a recent decision (Cantero) explaining the correct legal standard for analyzing national bank preemption.  Under Cantero, a state law is preempted if it significantly interferes with a national bank’s exercise of its powers.  This is not a bright-line test, but instead requires a practical assessment of the nature and degree of the interference, including consideration of the types of state laws which courts have previously accepted or rejected under bank preemption analysis.

On remand, the Ninth Circuit reconsidered whether the California interest-on-escrow law was preempted.  The court found that no legal authority established that state interest-on-escrow laws prevent or significantly interfere with the exercise of a national bank’s powers.  Further, the Dodd–Frank Act contains provisions requiring payment of interest on certain types of escrow accounts where otherwise required by state law, which suggests that Congress also did not consider these types of interest payments to be a significant form of interference.  Accordingly, the Ninth Circuit held that the California interest-on-escrow law was not preempted when considered in light of the Supreme Court’s Cantero decision.