US Supreme Court Unanimous Decision on National Bank Preemption Rights

A rare unanimous decision of the US Supreme Court told the Second Circuit to take a second look at national bank preemption rights, according to an article by Mercedes Kelley Tunstall, a financial regulation specialist at Cadwalader.

In Cantero v. Bank of America, the question was whether Bank of America, a national bank, could preempt a New York state law requiring the payment of interest on mortgage escrow balances. The Supreme Court asked the appeals court for a “nuanced comparative analysis” of the case.

Justice Kavanaugh’s opinion took issue with the way the Second Circuit relied on cases stemming from McCulloch v. Maryland, a Supreme Court decision, and attempted to “distill a categorical test” that would allow national banks to draw a clear line regarding when state laws are or are not preempted.

The ruling instructed the Second Circuit to instead rely on Barnett Bank of Marion County, N.A. v. Nelson. That decision referenced the Dodd-Frank Act with respect to when a state consumer protection law is preempted. It determined that the National Bank Act preempts state law only if “the state law discriminates against national banks as compared to state banks; or prevents or significantly interferes with the exercise by the national bank of its powers.”

Banks will be keenly interested in what the Second Circuit decides, and whether the Supreme Court will have to rule again. That could take years. Meanwhile, Tunstall suggests that national banks consider complying with the state law, just to avoid the possibility of lawsuits like Cantero.