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From Banking and Finance Law Daily, April 23, 2018

Brief targets claim that state law did not ‘significantly interfere’ with National Bank Act

By Jacob Bielanski

Seven industry and consumer advocacy groups bolstered Bank of America’s call for a rehearing over a decision by the U.S. Court of Appeals for the Ninth Circuit, arguing that the panel provided "no explanation" as to why California laws did not "significantly interfere" with the National Bank Act. "The Panel’s decision … dramatically alters a fundamental rule of law that had been decisively established in multiple cases by this Circuit and the U.S. Supreme Court," the friends of the court brief reads. "[That] the [NBA] preempts states from regulating the rates and terms of a national bank’s products and services."

The amici curiae brief bolsters a request for an en banc rehearing filed a day earlier by Bank of America, N.A., after the appellate court reversed a lower court’s dismissal of a proposed class action over mortgage escrow interest payments (see Banking and Finance Law Daily, April 20, 2018). The complaint in Lusnak v. Bank of America N.A., originally filed in 2009, claimed that amendments to existing laws passed as part of the Dodd-Frank Act subjected the bank to California state laws, which mandate a minimum two percent interest payment to customers on mortgage escrow accounts. Bank of America won a dismissal at the district level, arguing that the NBA preempted state law, with the lower court arguing that Dodd-Frank’s amendments did not render California law applicable. In its reversal, the Ninth Circuit agreed that Dodd-Frank did not apply, but ruled that since the California law did not "significantly interfere" with Bank of America’s ability to operate under the NBA, the preemption standards did not apply.

The brief argues that subjecting the "billions" currently held by national banks in mortgage escrows to state laws such as California Civil Code § 2954.8 could force banks to charge higher rates or reduce the availability of mortgages. "The California-mandated 2% rate—which is well above current market rates—constitutes a significant interference with a national bank’s use of mortgage escrow accounts, which … are key tools used by national banks to manage their credit risk on millions of mortgages across the United States," the brief reads.

The groups argue that mortgage escrow accounts have become an important tool to minimize their risks from foreclosure, ensuring that taxes and insurance remain paid through the process. They also argue that these accounts have had the effect of reducing foreclosures. "Indeed, it is ironic that the Panel cites the Dodd-Frank Act as being designed to prevent the loss of homes through foreclosures, while its decision would restrict an approach that has been recognized as reducing foreclosures by helping to ensure timely payments of taxes and other housing costs," the brief reads.

In addition to the question of "significance" related to the current case, the brief expressed concerns that the decision would open up banks to regulations from all 50 states. Minnesota law, it noted, currently mandates its banks pay three percent on mortgage escrow accounts.

Further issues were cited concerning the panel’s interpretation of the Dodd-Frank amendments to the Truth in Lending Act, which potentially open up state level control. It argues the appellate court’s reference to the amendment’s words on "applicable" state law used a definition that equated it to "existing," as opposed to what it saw as the standard meaning of "legally relevant."

The brief further argues that the appellate court’s determination that two percent was not "punitively high" for interest rates, raised concerns that the court would place itself in "the business of deciding, on an ongoing basis—and, presumably, depending on the then-current level of interest rates—when a statutory rate is ‘punitively high’ and when it is not."

The Case is No. 14-56755.

Companies: Bank of America, N.A., American Bankers Association; Consumer Bankers Association; Chamber of Commerce; Mortgage Bankers Association; Financial Services Roundtable; Housing Policy Council; The Clearing House

MainStory: TopStory AlaskaNews ArizonaNews BankingOperations CaliforniaNews ConsumerCredit DoddFrankAct GuamNews HawaiiNews IdahoNews InterestUsury Loans MontanaNews Mortgages NevadaNews OregonNews Preemption StateBankingLaws TruthInLending WashingtonNews

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