Bank of America escrow case plaintiffs claim NY law is no 'impediment'

A dual banking case related to escrow rules is progressing for the first time since the Supreme Court remanded it to the U.S. Court of Appeals for the 2nd Circuit in May.

The plaintiffs in the lawsuit, Cantero v. Bank of America, have resumed with claims that the institution has so far failed to show that New York's requirement to pay 2% interest on mortgage escrow accounts is a "significant practical impediment to exercising banking power." 

"If Bank of America believes it can substantiate its claims of significant interference, it is free to try and make that showing as the case proceeds to discovery," Jonathan Taylor, plaintiffs' attorney at law firm Gupta Wessler LLP, said in an August 26 court filing.

Bank of America has not responded in the court record or to a request for comment at deadline.

The Real Estate Settlement Procedures Act does not mandate that national banks pay interest to borrowers on escrow accounts, but New York State laws do. The Dodd-Frank Act determined that the National Bank Act preempts state law only when the significant practical impediments exist, the plaintiffs argue. 

However, according to the Supreme Court's opinion in the Cantero case, which Justice Brett Kavanaugh authored, The National Bank Act as amended by Dodd-Frank does not draw a "bright line" when it comes to the questions of preemption. 

The plaintiffs' filing follows the Supreme Court directing the 2nd Circuit to rehear the case and to consider a "competitive nuanced analysis" of potential outcomes. Its previous decision favored the bank. 

The outcome is important to both banks and those in housing finance generally because escrow accounts can play a role in the valuation of mortgage servicing rights in the market and some lending considerations. Thirteen states have interest-on-escrow laws.

The new filing in the Cantero case comes shortly after a new development in somewhat similar cross-litigation between certain Flagstar Bank customers and that financial institution in regard to a California law around 2% interest on escrow accounts. 

The Biden administration had called upon the Supreme Court to remand both lawsuits. The respective lower courts originally had reached different conclusions in each case.

The 9th Circuit on August 22 affirmed its prior decision in Kivett v. Flagstar Bank, which supports the plaintiffs in that lawsuit.

Plaintiffs in the Cantero case said the latest Kivett v. Flagstar Bank development also supports their conclusions.

However, Flagstar is in a position to appeal, according to a notice administrator for the latter case.

When it comes to next steps in the Cantero lawsuit, one that the court has asked the parties involved to address is the question of whether it should affirm the previous decision in the lawsuit or hand the question back to the district court. 

"Remand is unnecessary," the plaintiffs in the Cantero case opined.