June 14, 2019

It’s Final: National Bank Act Does Not Preempt California Requirement to Pay Interest on Escrow Accounts

Robert K. Olsen

The U.S. Supreme Court declined to review the decision of the Ninth Circuit Court of Appeals in Lusnak v. Bank of Am., N.A., 833 F.3d 1185 (9th Cir. 2018), which effectively overturned a national bank regulation preempting state mortgage escrow laws. At issue was California Civil Code Section 2954.8(a), which requires financial institutions to pay two-percent interest per year on funds held in mortgage loan escrow accounts. The Ninth Circuit found a way around a 2004 preemption determination by the Office of the Comptroller of the Currency, the division of the U.S. Treasury which regulates national banks, set forth 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.”

Although state laws are preempted if they prevent or significantly interfere with a national bank’s exercise of its powers, 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.” The Dodd-Frank Reform Act added section 1639(g)(3) to the Truth in Lending Act (TILA). The Dodd-Frank TILA amendment applies to only higher-priced mortgages and only requires creditors to pay interest to consumers on amounts held in any escrow account if prescribed by applicable law. Nonetheless, the Ninth Circuit applied section 1639(g)(3) to the entire Lusnak class.

In November 2018, the Supreme Court denied certiorari despite the OCC’s amicus brief urging that the case be heard. The OCC asserted that the Ninth Circuit’s decision erred in a matter of fundamental importance to the national banking system and pointed to the Supreme Court’s own decision giving the OCC authority to make preemption determinations in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). Bank of Am., N.A. v. Lusnak, 139 S. Ct. 567 (2018).

The immediate result of the Supreme Court’s refusal to review the case is that national banks must pay at least two-percent annual interest on escrow accounts in California. Whether the Ninth Circuit’s constrained view of preemption will be applied to other state-law requirements (for example, maximum late charges under Civil Code Section 2954.5), or be adopted by other circuits, remains to be seen.

Robert K. Olsen

Principal; Aldrich & Bonnefin, PLC

Robert K. Olsen is a principal of Aldrich & Bonnefin, PLC, Irvine, California.  He heads the firm’s Consumer Practice Group, specializing in consumer financial regulatory compliance, financial privacy, mortgage lending, fair lending and other regulatory matters.  Mr. Olsen graduated from UCLA Law School in 1983, Order of the Coif, and is a member of the State Bar of California and the Consumer Financial Services Section of the American Bar Association.