Last Thursday the Supreme Court decided Cantero v. Bank of America, a case asking whether New York’s law requiring the payment of interest on certain mortgage escrow accounts applies to national banks or is instead preempted by the National Bank Act. Presented with that question, the Supreme Court declined to directly answer it, instead issuing a short unanimous opinion saying that in analyzing whether a state law is preempted by the National Bank Act a court must undertake a “practical assessment of the nature and degree of the interference required by state law.” Because the Second Circuit’s 2022 decision in favor of Bank of America failed to undertake this sort of practical assessment, the case has been remanded to the Second Circuit for it to conduct the analysis anew.
In reaching this result, the Supreme Court acknowledged the desire of both the plaintiff homeowners and the defendant Bank of America for “a clearer preemption line.” But, the Court said, this sort of guidance is not within its power to provide. Under the Dodd-Frank Act the preemption analysis at issue here1 must follow the standard the Court set out in Barnett Bank, and “Barnett Bank did not draw a bright line.”
Even though neither party got the bright line result it was seeking, there are aspects of the decision that both sides of the preemption debate may attempt to leverage in their favor, not just on remand before the Second Circuit but also in preemption debates more broadly. This post takes an early look at a few arguments on each side.
Pro-National Bank Act Preemption
Proponents of stronger National Bank Act preemption may take away the following from the decision as arguably supporting their position.
Confirmation that Dodd-Frank Codified the Barnett Bank Standard
In footnote 2 of its decision, the Supreme Court endorsed two conclusions. First, the court said that when it came to preemption, “Dodd-Frank adopted Barnett Bank.” Second, the Court said that “Barnett Bank was also the governing preemption standard before Dodd-Frank.” In other words, the Dodd-Frank Act did not change the standards against which National Bank Act preemption is to be evaluated.
In the early days after the passage of Dodd-Frank, there was a live debate over this. In 2011 when the OCC proposed to revise its preemption regulations, comments on the proposal brought to light a sharp split between Senators who had voted for Dodd-Frank as to what exactly they meant this provision of the law to do. A Congressional Research Service report explains (emphasis added throughout):
After the OCC issued the notice, the Treasury Department’s General Counsel wrote a letter to the Comptroller of the Currency arguing that the OCC’s proposed rule was “inconsistent with the plain language of [Dodd-Frank] and its legislative history.” Specifically, the Treasury Department argued that interpreting Section 1044 as making no significant changes to existing preemption law conflicted with “basic canons of statutory construction” and legislative history indicating that the provision was intended to “revise[]” the OCC’s preemption standard. Senator Carl Levin also expressed disagreement with the proposed rules in a letter to the Comptroller, arguing that “[i]f [Congress] had wanted to leave the OCC’s purported federal preemptive powers unchanged, [it] could have engaged in a very simple exercise—do nothing.”
Other Senators expressed support for the OCC’s proposed rules. Senators Tom Carper and Mark Warner criticized the Treasury Department’s letter for “ignor[ing] the clear legislative history indicating that [Section 1044] is intended to codify the Barnett case.”
The OCC ultimately agreed with Senators Carper and Warner. In July 2011, the OCC published a final regulation revising its preemption rules. In the final rule, the OCC concluded that “the Dodd-Frank Act does not create a new, stand-alone ‘prevents or significantly interferes’ preemption standard, but, rather, incorporates the conflict preemption legal standard and the reasoning that supports it in the Supreme Court’s Barnett decision.”
Thirteen years later, the Court this week has sided with the OCC, at least on this specific point about what Dodd-Frank was trying to do.2
Notable, too, are the Court’s statements explaining that by incorporating the Barnett Bank standard the Dodd-Frank Act means that courts reviewing National Bank Act preemption questions ought to consider not only Barnett Bank itself, but also the Supreme Court’s other National Bank Act preemption precedents.
Given Dodd-Frank’s direction to identify significant interference “in accordance with” Barnett Bank, courts addressing preemption questions in this context must do as Barnett Bank did and likewise take account of those prior decisions of this Court and similar precedents.
Franklin National Bank as the Leading Example of Significant Interference
Because a proper preemption analysis must look at both Barnett Bank and “the other precedents on which Barnett Bank relied,” the Court’s opinion first discusses precedents where a state law’s interference with a national bank’s powers led the Court to conclude that the state law should be preempted. After that, the opinion turns to a discussion of precedents where the Court previously concluded that a given state law should not be preempted.
When discussing the cases where there was significant interference with national bank powers, and thus where preemption was appropriate, the Court’s opinion calls Franklin National Bank of Franklin Square v. New York “[t]he paradigmatic example of significant interference identified by Barnett Bank.”
The Franklin National Bank case, decided in 1954, concerned a New York law that prohibited banks from using the word “saving” or “savings” in their advertisements. The Court concluded that this amounted to significant interference with the power of national banks to receive savings deposits, and to advertise that power to the public.
In its merits briefing, Bank of America noted that the Court in Franklin National Bank reached this conclusion even though the actual effects of the law were pretty limited:3
Even though “savings” commonly described the accounts at issue, the state law hardly prevented or rendered impracticable banks’ power to receive or advertise savings deposits. The state court even found that every other national bank in New York complied by using synonyms for “savings.” This Court still deemed the state ban on the word “savings” preempted because it “subject[ed]” national-bank powers “to local restrictions.”
So, the argument might go, if Franklin National Bank is the paradigmatic example of a preemption case, and if the state law in question interferes to any equal or greater degree than did the New York law at issue in Franklin National Bank, then the state law should be preempted. And if a law preventing a bank from using a specific word amounts to significant interference, then isn’t a state law that dictates the rate of interest on escrow that national banks must pay to customers very likely to be a significant interference as well?4
As for cases where the Court has previously found that state laws were not preempted, the opinion gives three examples:
A decision from 1870 that determined that a state tax was not preempted as applied to national banks.
A decision from 1896 that determined that generally applicable contract law was not preempted as applied to national banks.
Anderson National Bank v. Luckett (1944), a case involving a Kentucky law that required banks to turn over abandoned deposits to the state.
All of these laws are already explicitly cited in the OCC’s 2011 preemption regulations as the types of laws, among others, that generally are not preempted.
Anti-Preemption
Proponents of stronger limits on National Bank Act preemption and a more significant role for state consumer financial laws may take away the following from the decision as arguably supporting their position.
Confirmation that Dodd-Frank Codified the Barnett Bank Standard
The section above discussed how the Court’s confirmation that Dodd-Frank codifies Barnett Bank and does not change the pre-Dodd-Frank preemption standard could be viewed as a positive for the pro-preemption side of the debate. But there is also a view, expressed for example by former Treasury official Graham Steele on X after the decision came down, that the Court’s opinion is actually a positive for the anti-preemption side of the argument, because it represents a rejection of the OCC’s efforts to go beyond Barnett Bank with its preemption regulations.
Assuming it sticks to its long held position on preemption,5 the OCC would deny that the preemption regulations it adopted or reaffirmed in 2011 are inconsistent with Barnett Bank, but the Court’s language does, at a minimum, leave the door open for further debate.
This is an argument some groups were quick to take up following the release of the opinion. For example, a statement released on Thursday by the President and CEO of the Conference of State Bank Supervisors called on the OCC to “immediately revisit its preemption rules and processes” which CSBS argues have “ignored for over a decade” the requirements of the Dodd-Frank Act.
A few Justices on the Supreme Court may be receptive to this sort of claim, should it ever be presented to them.6 Recall Justice Gorsuch’s questions at oral argument a few months ago wondering, “is the OCC ever going to get around to doing that which Dodd-Frank directs it to do?”7
A Bank by Bank, Or at Least State Law by State Law, Approach
Writing at Credit Slips, Professor Adam Levitin argues that the Court’s decision “opens the way to more expansive state consumer financial regulation that affects banks.” Further, Professor Levitin believes that, in this specific case, Bank of America is a clear loser under a prevents or significantly interferes standard:
Given how de minimis mortgage escrow interest is relative to anything with Bank of America, it's hard to imagine that Bank of America will prevail on the remand under the Barnett Bank standard.
See also this blog post from Ballard Spahr that, though not as directly as Professor Levitin does, seems to contemplate a similar result:
With no bright line test, the Barnett Bank analysis as to whether a state law like New York’s interest on escrow accounts “prevents or significantly interferes” with a national bank’s powers could vary based on a bank’s asset size.
I am not sure this sort of bank-by-bank approach is what the Court’s decision endorses,8 nor is it what the plaintiffs in this case claimed to be asking for.9
But even if a bank-by-bank approach is not required, the Court’s opinion could be read as, at a minimum, making it harder for the OCC to take an across-the-board approach to future preemption questions. This was the view expressed by a couple of folks quoted in Bloomberg Law yesterday:
“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.
This matters not only for what you might call traditional state consumer financial laws, but also for laws like the recently proliferating state fair access laws that seek to pull national banks in the other political direction.
Under the relevant provision of Dodd-Frank, a state consumer financial law may be preempted as applied to national banks if (A) the state consumer financial law would have a discriminatory effect against national banks as compared to state banks, (B) in accordance with Barnett Bank, the state consumer financial law would prevent or significantly interfere with a national bank’s exercise of its powers or (C) the state consumer financial law is preempted by certain other federal laws. The Court’s decision focuses on the meaning of (B), noting that (C) may need to be considered by the Second Circuit on remand. See footnote 4.
During the course of the litigation, the parties have raised two other issues that the Court of Appeals did not address and that it may address as appropriate on remand: […] second, the relevance here (if any) of the Dodd-Frank provision that preempts state consumer financial laws if a federal law “other than title 62 of the Revised Statutes” preempts the state law, 12 U. S. C. §25b(b)(1)(C).
As discussed later in this post, even if you take it as a given that Dodd-Frank codified Barnett Bank, whether the OCC’s current preemption regulations are indeed consistent with Barnett Bank and the requirements of the Dodd-Frank Act is a different question, and one which the Court did not answer.
The citations have been removed from this quote to make it easier to read.
As a preview of what the counterargument to this sort of point might be, see this exchange between Justice Alito and counsel for the plaintiffs:
JUSTICE ALITO: I mean, the law said they couldn't use savings in their advertising, but they could use a comparable phrase like special interest account. […] So, if -- if any interference that's greater than the interference there is -- is enough, that wouldn't be -- I -- I don't see how you can win under that.
MR. TAYLOR: Two responses, Justice Alito. The -- if you look at the testimony in that -- in that case, it was clear that consumers had no idea what "interest-bearing account" meant. I mean, there were -- the word "savings" actually mattered to their purchasing decisions, and it had a real-world effect, and that was a law that was discriminatory and put the national banks at a serious competitive advantage -- disadvantage vis-à-vis state banks.
And for an argument about the practical effects in this case, see this later exchange between Justice Kagan and counsel for the government:
JUSTICE KAGAN: [D]o you have a view on whether this New York [interest-on-escrow] statute constitutes a significant interference with national banking powers?
MR. STEWART: We don't have a concluded view. Certainly, as Mr. Taylor points out, this is something that state banks have been complying with, apparently, without material impairment. I think it would depend in part on evidence or a factual showing about what rate of interest can the banks use on the money in the escrow account because --
JUSTICE KAGAN: Can I interpret that […] as suggesting that you're skeptical that it's a significant interference?
MR. STEWART: Yes.
Compared to past practice the current OCC has been somewhat less vocal in defending National Bank Act preemption, but note that in November 2023 the agency’s then-Chief Counsel wrote a letter to national banks saying:
The OCC is aware that some states have passed laws or taken other actions that purport to apply to national banks and FSAs. The OCC is carefully monitoring the proliferation of competing and potentially inconsistent requirements. We are concerned about their impact on the ability of national banks and FSAs to provide banking services consistent with safety, soundness, and the fair treatment of customers.
Citing to the preemption regulations the OCC revised or reaffirmed in 2011, the letter went on to refer national banks to “OCC regulations [that] provide examples of the types of state laws that do not apply to national banks and FSAs.”
This could wind up cutting either way, but footnote 4 in the Court’s decision expressly reserves comment on “the significance here (if any) of the preemption rules of the Office of the Comptroller of the Currency.”
Fuller context for this exchange:
JUSTICE GORSUCH: It's interesting, I'm not sure what to make of this, but in the 13 years or so since Dodd-Frank, we don't have an OCC rule on escrow accounts, except for the one issued in 2011 immediately after Dodd-Frank in which it reaffirmed its rule banning, as I understand it, any regulation by states on escrow accounts under an "obstruct or impair" standard that predated Dodd-Frank that purported to ratify what it had done before under the old law. And -- and as I took it from a couple of cryptic footnotes in your brief, you're not asking us to defer to that regulation. In fact, you're asking -- you seem to suggest that it's inconsistent with the law and entitled to no respect. Why hasn't the OCC done something here under the law that actually exists?
[…]
MR. STEWART: Well, I think there are substantial indications in the text and history of Dodd-Frank that although Congress intended to codify the Barnett Bank standard, it intended to revise or overturn the way that the OCC had been making preemption --
JUSTICE GORSUCH: And then the OCC said maybe you thought so, but, ha, we promulgated it before Dodd-Frank, so you're stuck with it.
MR. STEWART: And --
JUSTICE GORSUCH: And now you're saying, nah, that's not right. And is the OCC going to actually do some of this work at some point under the law?
MR. STEWART: Well, as -- as far as I'm aware, the OCC has never issued a case-by-case preemption determination. And I don't know what the reason is, but I would say, if you imagine the OCC trying to do a case-by-case preemption determination with respect to the New York law at issue here, the most straightforward way to do it would simply be to say we have a regulation that says states can't regulate mortgage escrow accounts, this is a regulation of mortgage escrow accounts; therefore, it's preempted. But, if the OCC tried to do it that way, it would run into the provisions of Dodd-Frank that say, when the OCC does these determinations, it considers the impact of the state law --
JUSTICE GORSUCH: In fact, we have exactly the regulation. You say if they did this. They did it. They said there are no escrow regulations that are permissible under state law. They're all preempted. But you're not defending that regulation; you're disavowing it. You've flip-flopped positions on it. And I'm asking, is the OCC ever going to get around to doing that which Dodd-Frank directs it to do?
Footnote 3 in the Court’s decision directs lower courts to do as the Supreme Court has previously done and reach “conclusions about the nature and degree of the state laws’ alleged interference with the national banks’ exercise of their powers based on the text and structure of the laws, comparison to other precedents, and common sense.”
A counterargument to a bank-by-bank approach, then, is that this sort of approach does not appear to have been the method of analysis in Franklin National Bank, Barnett Bank or any of the other cases cited by the Court this week.
Barnett Bank, for example, did not differentiate between, on the one hand, a small national bank for which selling insurance in small towns was material to the national bank’s bottom line and, on the other hand, a larger national bank that was hardly involved in that sort of business. And in Franklin National Bank, as noted above, there was some evidence to suggest that as a practical matter national banks were not hampered very much by the state law at issue, but the Court still comfortably concluded that the state law amounted to significant interference for purposes of the preemption analysis.
At oral argument there was this exchange:
JUSTICE ALITO: Do you -- do you think that the significant interference test should be applied on a bank-by-bank basis or on an industry basis?
MR. TAYLOR: No, it's not bank by bank. That's not how it works in our view. If you look at the statute, it's clear that when the OCC makes preemption determinations, it -- it does so on a law-by-law basis, not a bank-by-bank basis.