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U.S. Supreme Court Unanimously Reverses Second Circuit Ruling on Dodd-Frank Preemption in Mortgage Escrow Interest Class Action

A class of New York homeowners notched a temporary victory yesterday as the Supreme Court of the United States ruled unanimously that the U.S. Court of Appeals for the Second Circuit erroneously applied the Dodd-Frank Act’s preemption standards in a case involving the amount of mortgage escrow interest banks must pay consumers.  Many states, including New York, have laws dictating the minimum amount of interest that must be paid to homeowners based on the balance the homeowners pay into their mortgage escrow accounts.  In this class action, Bank of America persuaded the Second Circuit (despite an adverse ruling below) that it was not required to comply with New York law because it was a national bank subject to Dodd-Frank rather than state law.  The Supreme Court disagreed with the preemption finding, ruling that proper application of the preemption standard required a nuanced and “practical assessment of the nature and degree of the interference" caused by state laws regarding interest payments.  The Supreme Court concluded that the Second Circuit read Dodd-Frank’s specific language exempting national banks from any state law that "preempts or significantly interferes with" national bank’s banking powers too broadly.  While the Second Circuit could ultimately rule that Dodd-Frank does preempt New York law in this area under the requested nuanced assessment, the Supreme Court, in an opinion authored by Justice Kavanaugh, concluded that the standard the Second Circuit had initially applied could “preempt virtually all state laws that regulate national banks” and thus was inconsistent with Dodd-Frank and controlling precedent.  The Court was careful to point out that “not all state laws regulating national banks are preempted” and “appreciated the desire by both parties for a clearer preemption line one way or the other,” so it reversed the Second Circuit’s decision and remanded it back to that appellate court for a second look.


mortgage, class action, supreme court, financial services, new york law, dodd-frank, regulatory law, mortgage escrow, legal analysis, banking industry, financial regulations, national banks regulation