National bank loophole to state consumer financial laws probed by high court

WASHINGTON (CN) — The Supreme Court grappled Tuesday with whether state consumer financial laws can override federal banking laws.

The justices seemed concerned about the outcome of ruling either way in the case, which stems from a New York law that would force Bank of America to pay interest on escrow accounts. 

Justice Neil Gorsuch, a Donald Trump appointee, suggested the bank wants to have its cake and eat it too by preventing states from enforcing banking laws and letting national banks operate free of state control. 

Bank of America said New York’s escrow interest law did not apply to it because the National Banking Act preempts the law. The bank want the justices to rule that any state law that interferes with national banking power is preempted by federal law. 

“A patchwork of 50 of these state laws would unduly burden national banks, destroying their uniform federal character,” said Lisa Blatt, an attorney with Williams & Connolly representing the bank. 

Justice Elena Kagan, a Barack Obama appointee, said the reasoning behind that argument would exempt banks from all but a few state laws they’ve already agreed to comply with. 

“In a way, what you're trying to do is to gerrymander a world in which fair lending laws — which everybody thinks kind of has to apply to national banks — apply to national banks but nothing else does,” Kagan said. 

Justice Ketanji Brown Jackson, a Joe Biden appointee, said the bank’s only argument was that ruling against it would make its life more difficult. 

“You are making the argument that it is really going to be very challenging for banks if we rule against you in this case, and I don't understand why that's the case,” Jackson said. 

Justices Samuel Alito, a George W. Bush appointee, and Brett Kavanaugh, a Donald Trump appointee, fell on the opposite side of the argument, worrying about the consequences of forcing banks to litigate many state law challenges. 

Alito said every federal judge across the country would have to make determinations requiring economic expertise and knowledge of the banking industry. He worried that juxtaposing outcomes in those cases could lead to “practical nightmares.” 

Kavanaugh said the court was not “totally at sea,” having decades of precedent to guide their decision. He seemed to interpret this precedent to say state laws could not significantly interfere with federal laws. Kavanagh said the court’s precedents involved how banks could advertise but New York’s law would directly interfere with Bank of America’s operations. 

“Telling a bank not how to describe your product in your advertising, but that you actually have to pay money that you wouldn't otherwise pay, I mean, that's much more direct interference with the operations of the bank,” Kavanaugh said. 

Three New York homeowners sued Bank of America for failing to pay interest on their escrow accounts. Alex Contero, Saul Hymes and Ilana Harwayne-Gidansky deposit funds into escrow accounts to cover property taxes and home insurance. 

New York requires lenders like Bank of America to pay homeowners at least 2% annual interest on their escrow account balances. New York’s law  — and others like it in other states — aims to prevent lenders from getting an interest-free loan from borrowers. Bank of America refused to pay interest on the homeowners’ accounts. 

The homeowners say reading federal law to preempt New York’s escrow law would invalidate every similar statute. 

“Section 25b’s definition of state consumer financial law is incompatible with the control test because it would require that every such law be preempted, nullifying the statute and erecting the very field preemption regime that the statute forbids,” said Jonathan Taylor, an attorney with Gupta Wessler representing the homeowners. 

The justices will issue a ruling on the case by the end of June. 

Follow @KelseyReichmann

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