OCC Unveils Aggressive State Banking Law Preemption Moves

Key takeaways:

• Federal preemption of state banking law is a cornerstone of the national-banking system. But it is not always clear when a federal law preempts a state law that affects national banks.
• In Cantero—which concerned state regulation of escrow accounts used in residential mortgage lending and servicing—the Supreme Court declined to provide greater certainty in applying the tests used to determine whether a state law is preempted.
• The OCC has stepped in to resolve the pending escrow-account litigation in one fell swoop, with a belt-and-suspenders action to preempt the state laws in question. It remains to be seen whether the OCC's aggressive approach will withstand judicial scrutiny in light of Loper Bright and Cantero.
• Regardless of the resolution on escrow accounts, the OCC's aggressive moves demonstrate its ability and willingness to use regulatory and preemption authority to preclude consumer litigation against national banks.
• National banks and other federally chartered or licensed institutions should still conduct careful preemption analyses under Cantero.

Federal preemption of state banking law: the basics

Under the U.S. dual banking system, national banks hold federal charters and are primarily subject to federal regulation, whereas state banks are chartered by inpidual states and are primarily subject to state regulation, with important federal overlays.

National banks are not generally subject to otherwise applicable state-level banking law. This preemption—that federal banking rules preempt any inconsistent state laws for federally chartered banks—is a cornerstone of banking law, going back over two centuries to disputes about Maryland's attempts to tax the Bank of the United States. The scope of this preemption has been continually debated ever since.

The National Bank Act (NBA) provides for national banks with federal charters, and courts have essentially developed a common law of preemption that examines whether a specific state rule should be preempted for interfering with a national bank's federally-granted powers under the NBA. More recently, as part of Dodd-Frank, Congress established a preemption framework for state consumer-financial protection laws that expressly codified the common-law test (or, Barnett¹ standard), along with other brighter-line preemption rules.

The general preemption rule is that where a state banking law directly conflicts with federal law, federal law will preempt the state law; where a state law is generally applicable and doesn't interfere with banking, then the state law is not preempted. But gray areas exist where state laws are not directly inconsistent with federal law but may indirectly interfere with national banking activities directed or permitted by the NBA.

Cantero: The Supreme Court declined to resolve questions about escrow accounts

Preemption is a particularly big deal for state consumer-financial protection laws that affect national banks. One such law was at issue in the 2024 Supreme Court case, Cantero v. Bank of America.² Cantero concerned whether states may regulate escrow accounts held by national banks related to mortgage servicing. Mortgage servicers typically create escrow accounts to smooth out payment of property taxes and property insurance over the course of the year to ensure that all payments are made timely. The state of New York (like many other states), requires banks to pay 2% interest on the balances of escrow accounts to its customers. The question posed in Cantero was whether these interest payment requirements were preempted for national banks. There was no on-point federal statute or regulation that governed escrow account maintenance, but the Second Circuit nonetheless held the New York law was preempted under a bright-line rule that would preempt many state laws affecting national banks.³ Critically, the court did not analyze the preemption standard under Barnett as required by Dodd-Frank.

The Supreme Court took the case, but did not decide the substantive question of whether state escrow-account regulations are preempted. Instead, the Supreme Court rejected the bright-line preemption test used by the Second Circuit and remanded for further consideration consistent with Dodd-Frank and Barnett. The test outlined in Cantero requires the lower courts to consider a constellation of Supreme Court precedents going back to 1870 and place any disputed law within that framework.

The problem with this comprehensive approach is that it does not always produce consistent outcomes—and reasonable minds can differ on the application of the preemption standard. Indeed, the two federal circuit courts that have issued decisions post-Cantero have disagreed about how the governing standard should apply, though in each case the escrow-account regulations were not preempted. And the same question has been fully briefed and argued before another circuit, so another panel may yet come to a different conclusion.

Escrow accounts aside, and notwithstanding uncertainty about judicial application of Dodd-Frank and Barnett, national banks should consider conducting a good faith, reasoned analysis under Cantero and Barnett, understanding that in not all cases will these provide absolute certitude. As the Supreme Court emphasized in Cantero, whether a state law "prevents" or "significantly interferes" with a national bank's power, and thus must be preempted, will necessarily be fact-based.

The OCC's double-barreled preemption gambit

Recently, the OCC has taken two steps to preempt the escrow-account laws at issue in Cantero. First, the OCC has proposed a regulation that would expressly permit national banks to use their business judgment to structure and maintain residential-mortgage escrow accounts, including whether to pay interest or charge fees. If the regulation is finalized in its current form, it would necessarily preempt any state law that purports to limit a national bank's discretion in how it administers escrow accounts (including the New York law at issue in Cantero that required minimum interest to be paid on escrow account balances).

Second, somewhat independently, the OCC proposed using its authority under 12 U.S.C. 25b(b)(1)(B) to determine that, under current law, all state escrow account interest-rate laws are preempted under Dodd Frank and Cantero. The OCC's reasoning demonstrates the malleability of the Cantero test—whereas the federal circuit courts that considered the issue have concluded that escrow-account regulations are not preempted by the NBA post-Cantero (albeit for different reasons), the OCC argues unequivocally that Cantero requires preemption.

The OCC's choice to pursue a belt-and-suspenders approach is indicative of the fact that the OCC faces a long road ahead on either of its preemption proposals. The OCC's authority to issue the escrow-account regulation under various broad statutes is sure to be contested, especially following the Court's decision in Loper Bright encouraging judicial skepticism of regulatory interpretation of statutes and associated decision-making in the absence of clear guidance from Congress. The OCC has, however, strengthened its hand against any Loper Bright argument by basing its rulemaking authority on three distinct statutes: the Federal Reserve Act, the Home Owners Loan Act of 1933, and the National Bank Act. The OCC's invocation of the Federal Reserve Act and HOLA, in particular, may prove to be a savvy move, as those statutes may grant the OCC discretion in its rulemaking and thus may be less directly restrained by Loper Bright.

Likewise, as demonstrated by the First and Ninth Circuits' decisions on similar issues, the OCC's preemption determination may be rejected outright by federal courts as unpersuasive.⁴

OCC preemption as deregulatory weapon

Aggressive interpretations of preemption under the NBA is an area where the Trump administration's deregulatory agenda aligns with the OCC's longstanding institutional inclination. With some interruptions, the OCC has long advocated for robust federal preemption of state laws that interfere with national banks' exercise of their powers. And here, robust preemption means that national banks will not be subject to state consumer-financial protection laws that, the administration argues, make it more costly and onerous for national banks to provide mortgages and associated escrow accounts. Increasing homeownership and reducing costs associated with mortgages is a key administration policy.

Given the remarkable open-endedness of the Cantero standard, the administration may continue to use OCC preemption as a deregulatory tool intended to provide clarity for national banks. One of the key benefits of this approach for the administration is that it allows federal authorities focused on deregulation to prevent states from enforcing their own banking and consumer financial protection laws.

Footnotes

1. See generally Barnett Bank, N.A. v. Nelson, 517 U.S. 25 (1996).

2. 602 U.S. 205 (2024).

3. Cantero v. Bank of America, N.A., 49 F.4th 121 (2d Cir. 2022).

4. Loper Bright does not directly affect OCC preemption determinations made pursuant to the NBA, because the NBA itself prescribes the degree of deference courts should afford the OCC on review. Here, Congress codified the lesser standard from Skidmore v. Swift & Co., 323 U.S. 134 (1944).

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