The U.S. Supreme Court the Ninth Circuit Court of Appeals鈥 decision in聽. 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, 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. 搂 34.4(a)(6), which states, 鈥淸a] national bank may make real estate loans . . . without regard to state law limitations concerning . . . [e]scrow accounts, impound accounts, and similar accounts.鈥
The 2010 Dodd-Frank Act, at provides that state consumer financial laws are preempted only where state law 鈥減revents or significantly interferes with the exercise by the national bank of its powers,鈥 codifying , 517 U.S. 25 (1996). Dodd-Frank also requires that the OCC make any preemption determinations 鈥渙n a case-by-case basis.鈥 12 U.S.C. 搂 25b(b)(3).
Here, the Ninth Circuit determined 鈥渘o 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.鈥
While the Dodd-Frank Reform Act added (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聽Lusnak.
In , the Supreme Court denied certiorari despite the Office of the Comptroller of the Currency (OCC) asserting that the Ninth Circuit鈥檚 decision erred and that the Supreme Court鈥檚 decision in聽, 517 U.S. 25 (1996) gave the OCC authority to make preemption determinations.
Lusnak indicates at least one circuit鈥檚 current recognition that OCC preemption rules fail to comply with 12 U.S.C. 搂 25b and the Supreme Court鈥檚 Barnett Bank standards. OCC preemption rules are entitled to 鈥渓ittle, if any, deference.鈥 Lusnak requires 鈥渃ompelling evidence鈥 that state law interferes with a national bank鈥檚 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鈥檚 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鈥檚 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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