NY homeowners bring mortgage escrow interest payment fight back to 2nd Circuit

MANHATTAN (CN) ­— Bank of America urged a Second Circuit panel on Monday afternoon to toss out a class action brought by New Yorkers who challenged the lender’s refusal to pay interest on escrow deposits it collects to pay borrowers’ insurance and property tax bills.

The issue returns to the Second Circuit on remand from the Supreme Court, which unanimously found the appellate court did not perform the kind of nuanced analysis required by federal law and prior high court decisions to determine if a state law must give way to a federal statute.

While the three-judge Second Circuit panel did not rule from the bench Monday afternoon on Bank of America’s appeal, U.S. Circuit Judge Debra Ann Livingston — a George W. Bush appointee — told the parties: “I’m looking for a viable definition of what significant interference is.”

Represented by Lisa Blatt, chair of Williams & Connolly’s Supreme Court and appellate practice, Bank of America argued the state escrow interest rate laws interfere with banks’ “express mortgage power,” and that Congress deliberately chose not to subject national banks’ real-estate lending powers to state law.

“I think it is hard to imagine a greater intrusion, in terms of severity and extent, than controlling the price of a mortgage product,” Blatt said. “And if you say that this law is not preempted, it does pave the way for a state to regulate all aspects of a mortgage, like the down payment, and actually the state could ban escrows altogether unless reasonably necessary.”

Bank of America argued the lower court’s rejection of its preemption defense conflicts with Supreme Court precedent and Office of the Comptroller of the Currency regulations by requiring the payment of interest on mortgage escrow accounts and by specifying a minimum interest rate. “If affirmed by this court, the district court’s ruling will permit exactly the type of duplicative regulation the National Bank Act is designed to avoid,” the bank said in its appellant brief.

U.S. Circuit Judge Michael Park, a Donald Trump appointee, asked whether it’s a Bank of America question or a national bank industry question.

“Ultimately, it’s a question for the entire industry of national banks,” the plaintiffs’ attorney Jonathan Taylor responded.

The homeowners argue on appeal that that state escrow interest laws do not rise to the level of interference with the exercise by the national bank of its powers that would warrant preemption.

“Quite the opposite: federal law expressly contemplates — and allows — enforcement of state escrow interest laws,” the plaintiffs wrote in an appeal brief. “Bank of America’s arguments to the contrary have been universally rejected by the courts, are incompatible with Dodd-Frank’s text, purpose, and history, and have no limiting principle.”

U.S. Circuit Judge Myrna Pérez, a Joe Biden appointee, rounded out the panel.

The homeowners initially brought their class action in Brooklyn federal court against Bank of America, which they accused of skirting a state law that requires lenders to pay at least 2% of the annual interest on homeowners’ escrow accounts.

The homeowners deposited funds into their escrow accounts to cover property taxes and home insurance, and states like New York force banks to pay interest on that money so they aren’t getting an interest-free loan from borrowers.

Bank of America refused to pay the interest fee, claiming the National Banking Act preempts the law. The bank tried to dismiss the lawsuit on the ground that federal law preempts application of this state law to national banks, but a lower court denied its motion. The Second Circuit then reversed.

In May 2024, the Supreme Court gave the homeowners another shot at forcing Bank of America to pay interest on their escrow accounts.

In a unanimous ruling, the high court found that an appeals court incorrectly threw out a New York law mandating interest on escrow accounts in the face of federal banking regulations. Justice Brett Kavanaugh said the Second Circuit needed to instead thoroughly review how the two laws interacted.

The high court instructed the Second Circuit panel to reconsider where New York’s escrow interest law falls among the court’s precedents to decide if it can be preempted.

On appeal, Bank of America argues Congress granted national banks broad power to make real estate loans, without conditioning the exercise of that power on compliance with state law.

Thirteen other states have similar laws: Massachusetts, California, Connecticut, Iowa, Maine, Maryland, Minnesota, New Hampshire, Oregon, Rhode Island, Utah, Vermont and Wisconsin.

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