The U.S. Supreme Court declined to review the Ninth Circuit Court of Appeals’ decision in Lusnak v. Bank of Am., N.A., 833 F.3d 1185 (9th Cir. 2018). The decision significantly limits federal preemptive powers. In October 2019, Lusnak and Bank of America entered into an agreement to settle the lawsuit. Lusnak remains law in the Ninth Circuit.
In Lusnak, the Ninth Circuit struck down a regulation preempting a California state mortgage law. In this case, California Civil Code § 2954.8(a) required financial institutions to pay two-percent interest annually on money in mortgage loan escrow accounts. The Ninth Circuit overturned the regulation found in 12 C.F.R. § 34.4(a)(6), which states, “[a] national bank may make real estate loans . . . without regard to state law limitations concerning . . . [e]scrow accounts, impound accounts, and similar accounts.”
The 2010 Dodd-Frank Act, at 12 U.S.C. § 25b(b)(1), provides that state consumer financial laws are preempted only where state law “prevents or significantly interferes with the exercise by the national bank of its powers,” codifying Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). Dodd-Frank also requires that the OCC make any preemption determinations “on a case-by-case basis.” 12 U.S.C. § 25b(b)(3).
Here, the Ninth Circuit determined “no legal authority establishes that state escrow interest laws prevent or significantly interfere with the exercise of national bank powers, and Congress itself, in enacting Dodd-Frank, has indicated they do not.”
While the Dodd-Frank Reform Act added § 1639(g)(3) to the Truth in Lending Act (TILA), the amendment applies only to higher-priced mortgages and only requires creditors to pay interest on funds held in any escrow account if prescribed by applicable law. Yet, the Ninth Circuit applied section 1639(g)(3) to the entire class in Lusnak.
In November 2018, the Supreme Court denied certiorari despite the Office of the Comptroller of the Currency (OCC) asserting that the Ninth Circuit’s decision erred and that the Supreme Court’s decision in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) gave the OCC authority to make preemption determinations.
Lusnak indicates at least one circuit’s current recognition that OCC preemption rules fail to comply with 12 U.S.C. § 25b and the Supreme Court’s Barnett Bank standards. OCC preemption rules are entitled to “little, if any, deference.” Lusnak requires “compelling evidence” that state law interferes with a national bank’s exercise of its powers when a case involves consumer protection laws, an area traditionally regulated by the states.
A direct and immediate result of the Supreme Court’s declining to review Lusnak is that national banks must pay a minimum of two-percent interest annually on escrow accounts in California and throughout the Ninth Circuit. Banks operating in Oregon, Washington, Idaho, Montana, Arizona, Nevada, Alaska, and Hawaii will have to abide by state-law requirements to the extent they are statutorily analogous. In this case, as they relate to interest on escrow accounts.
Time will tell whether and how the Ninth Circuit’s interpretation of preemption will be applied to other state-law requirements, and in other federal circuits in 2020. A year after certiorari was denied, it remains law in the Ninth Circuit.
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