Extracted from Law360
Borrowers rang in the new year by celebrating the U.S. Supreme Court’s recent decision that it would not grant review of the Ninth Circuit’s ruling in Bank of America NA v. Donald M. Lusnak. The ruling — that states can enact laws requiring federal mortgage lenders to pay interest on funds held in escrow accounts — marks the start of a period of uncertainty for lenders nationwide. Now that Lusnak is law for the foreseeable future, we explore some of its implications.
Lusnak v. Bank of America
In March 2018, the Ninth Circuit ruled that Bank of America may have to pay borrower Donald Lusnak 2 percent interest per year on funds that it held in a California escrow account as required by California law.[1] Citing Dodd-Frank, the court held that California’s law was not preempted by federal law because it did not “significantly interfere” — a standard first articulated by the Supreme Court’s 1996 decision in Barnett Bank, North America v. Nelson — with the national bank’s exercise of its real estate lending powers under the National Bank Act. Federal law does not similarly require banks to pay interest on escrow accounts.
Notably, the Ninth Circuit did not explain why California’s law did not “significantly interfere” with a bank’s exercise of its lending powers, although it speculated that a state law that imposes “punitively high rates” on banks might meet the standard. Instead, the court reasoned that language elsewhere in the Dodd-Frank Act — that creditors must pay interest on escrow accounts “if prescribed by applicable State … law” — showed that Congress did not think state escrow laws would significantly interfere with national banking operations.
Significantly, the court of appeals all but ignored regulations from the congressionally established Office of the Comptroller of the Currency, which originally interpreted the preemption standard this way: “Except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized real estate lending powers do not apply to national banks.” The court said this interpretation did not accurately capture the Barnett standard. Therefore, according to the court, OCC preemption regulations are entitled to “little, if any, deference.”[2]
Background
Congress created the OCC around the same time it enacted the National Bank Act. An independent bureau of the U.S. Department of the Treasury, the OCC is responsible for chartering, regulating and supervising national banks.[3] As part of its role, the OCC issues rules and regulations governing those banks. These regulations include a laundry list of state laws that the OCC says are preempted by the National Bank Act.
Traditionally, banks and other lending institutions could look to OCC preemption rules with some degree of confidence. While these preemption regulations were always subject to some level of court review, even the Ninth Circuit once acknowledged that OCC regulations carried the preemptive force of a federal statute.[4] Many reviewing courts therefore deferred to OCC regulations under a principle called Chevron deference. Under this standard, the reviewing court would defer to OCC regulations so long as they were reasonable interpretations of controlling precedent.[5]
To be clear, Lusnak did not purport to change the standard of review that courts apply in reviewing OCC preemption regulations. Congress did that back in 2011 with the enactment of Section 1044(a) of Dodd-Frank, which clarified that OCC preemption regulations are entitled only to some degree of Skidmore deference.[6] This means that regulations are entitled to deference only to the extent they have the power to persuade.[7]
There is some question about whether this clarification represented a change in the law or merely codified existing precedent. Still, it removed any doubt about the correct standard that courts should apply in looking to OCC preemption conclusions. This clarification cemented a blow to the validity of OCC preemption conclusions. According to one study, courts are 20 percent less likely to uphold agency interpretations that receive Skidmore deference rather than Chevron deference.[8]
This proved particularly true in Lusnak, when the Ninth Circuit applied Skidmore deference in concluding that the OCC’s preemption rules were entitled to “little, if any, deference.” In reality, the Ninth Circuit did not defer even a “little” to the OCC. This appears to represent the first time a circuit court of appeals has expressly rejected a current OCC preemption regulation.
How will Lusnak alter the approach taken by other circuits?
Now that the Supreme Court has determined that any circuit split created by the Ninth Circuit’s approach is not worthy of immediate resolution, it remains to be seen how different circuits will approach OCC preemption regulations post-Lusnak.
The Ninth Circuit paved an unusual path, deviating even from its own prior decisions that had deferred somewhat to the OCC and its preemption determinations.[9] No prior Ninth Circuit case had questioned the validity of the OCC’s Barnett interpretation, let alone disregarded it.
The First, Second, Fourth, Fifth, Sixth, Eighth and Eleventh Circuits were on all fours with the Ninth before Lusnak.[10] That is, they showed deference to the OCC without purporting to invalidate the OCC’s interpretation of Barnett. It will be interesting to see how and to what extent Lusnak and Dodd-Frank might affect the preemption analysis in these and other circuits. One of the key consequences that may flow from Lusnak is whether other circuit courts will become emboldened to deviate from other or similar regulations promulgated by the OCC.
Although other circuit courts have addressed OCC preemption regulations since Dodd-Frank, none has addressed whether and to what extent Dodd-Frank affects the treatment of these regulations. These issues will continue to generate uncertainty until they are ultimately resolved by the Supreme Court.
What does Lusnak mean for other state escrow laws?
Only two states within the Ninth Circuit (California and Oregon) currently require lenders to pay interest on escrow accounts. A third (Alaska) has previously proposed legislation that would do the same.[11]
That number may increase now that the Ninth Circuit has effectively given the green light to do so to the remaining six states within its jurisdiction, provided the states do not impose “punitively high” interest rate requirements. While the Ninth Circuit has not said what “punitively high” means, it is clear that 2 percent —2.5 times the national average for interest paid on savings accounts in 2018 — is not.[12]
For the time being, mortgage lenders operating within the nine states that compose the Ninth Circuit will need to comply with these laws or else face the specter of opportunistic plaintiffs’ attorneys.[13]
Lenders that operate in the 41 states not bound by the Ninth Circuit’s decision may still have cause for concern. Of these states, plaintiffs’ attorneys have identified at least nine (Connecticut, Iowa, Maine, Maryland, New York, Minnesota, Rhode Island, Utah and Vermont) that have escrow interest laws similar to California’s. These attorneys are already gearing up to challenge banks that do not pay mortgage escrow interest in these nine states.
Underscoring this point, nearly 20 cases against noncompliant mortgage lenders have already sprung up across the country since the Ninth Circuit issued its decision in Lusnak. Although the majority of these cases have been filed in California — where Lusnak is binding precedent — other cases have been filed in Maryland and New York.[14] At least two of these cases — one a Maryland putative class action — were filed after the Supreme Court denied Bank of America’s petition for certiorari.
Unless and until the Supreme Court weighs in, mortgage lenders across the country will need to evaluate whether to comply with state escrow laws or take their chances in litigation. For many lenders, compliance will be the safer choice until the dust settles.
What does Lusnak mean for other “preempted” state banking laws?
According to OCC regulations, 13 other kinds of state laws significantly interfere with a national bank’s real estate lending powers under the National Bank Act.[15]
These “preempted” laws include those attempting to regulate credit reporting, loan-to-value ratios, access to and use of credit reports, and interest rates on loans. Undoubtedly, it will not be long before plaintiffs begin identifying specific state laws that fall within these regulations and challenge their validity in court. This may prove particularly true within the Ninth Circuit’s jurisdiction since the Ninth Circuit has demonstrated that it is willing to disregard OCC preemption regulations. National banks and mortgage lenders operating in California should be particularly prepared since California has demonstrated that it is willing to enact laws that strictly regulate banking operations.
Until the Supreme Court settles these issues, it is a new frontier for national banks and mortgage lenders operating in a traditionally uniform area of law.
[1] Cal. Civ. Code § 2954.8(a): Every financial institution that makes loans upon the security of real property containing only a one- to four-family residence and located in this state or purchases obligations secured by such property and that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, shall pay interest on the amount so held to the borrower. The interest on such amounts shall be at the rate of at least 2 percent simple interest per annum. Such interest shall be credited to the borrower’s account annually or upon termination of such account, whichever is earlier.
[2] Lusnak v. Bank of Am., N.A. , 883 F.3d 1185, 1193-94 (9th Cir. 2018).
[3] About the OCC, Office of the Comptroller of the Currency, https://www.occ.treas.gov/about/what-we-do/mission/index-about.html (last visited Dec. 27, 2018).
[4] Martinez v. Wells Fargo Home Mortg., Inc. , 598 F.3d 549, 555 (9th Cir. 2010) (“OCC regulations possess the same preemptive effect as the [National Bank] Act itself.”).
[5] Christensen v. Harris County , 529 U.S. 576, 586-87 (2000).
[6] 12 U.S.C. § 25b(b)(5)(A), (c).
[7] Christensen, 529 U.S. at 587.
[8] Kent Barnett & Christopher J. Walker, Chevron in the Circuit Courts, 116 Mich. L. Rev. 1, 6 (2017).
[9] See, e.g., Martinez, 598 F.3d at 556.
[10] Brief of Amicus Curiae Office of the Comptroller of the Currency in Support of Appellee’s Petition for Rehearing En Banc, No. 14-56755, p.13 n.1 (citing SPGGC, LLC v. Ayotte , 488 F.3d 525 (1st Cir. 2007); Wachovia Bank v. Burke , 414 F.3d 305 (2d Cir. 2005); Nat’l City Bank of Ind. v. Turnbaugh , 463 F.3d 325 (4th Cir. 2006); Wells Fargo Bank of Tex., N.A. v. James , 321 F. 3d 488 (5th Cir. 2003); Monroe Retail, Inc. v. RBS Citizens, N.A. , 589 F.3d 274 (6th Cir. 2009); Bank One, Utah, N.A. v. Guttau , 190 F.3d 844 (8th Cir. 1999); Baptista v. JP Morgan Chase Bank, N.A. , 640 F.3d 1194 (11th Cir. 2011)).
[11] H.B. 363, 19th Leg., 2d Sess., (Alaska 1995).
[12] Yoni Blumberg, You should feel dumb if you’re not getting this interest rate on your savings account, expert says, CNBC (Oct. 5, 2018, 1:43 PM), https://www.cnbc.com/2018/10/05/the-interest-rate-you-should-be-getting-on-your-savings-account.html.
[13] Lawsuit Investigation: Is Your Lender Paying Interest on Your Escrow Account? (Sept. 26, 2018), https://www.classaction.org/non-interest-bearing-escrow-accounts-lawsuits.
[14] Cantero v. Bank of Am., N.A., No. 1:18-cv04157 (E.D.N.Y. filed July 20, 2018); Clark v. Bank of Am., N.A., 18-cv-3672 (D. Md. filed Nov. 29, 2018).
[15] OCC regulations mandate that state restrictions on the following banking activities are preempted: (1) Licensing, registration, filings, or reports by creditors; (2) The ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements or risk mitigants, in furtherance of safe and sound banking practices; (3) Loan-to-value ratios; (4) The terms of credit, including schedule for repayment of principal and interest, amortization of loans, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan; (5) The aggregate amount of funds that may be loaned upon the security of real estate; (6) Escrow accounts, impound accounts, and similar accounts; (7) Security property, including leaseholds; (8) Access to, and use of, credit reports; (9) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents; (10) Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages; (11) Disbursements and repayments; (12) Rates of interest on loans; (13) Due-on-sale clauses; and (14) Covenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan. 12 C.F.R. § 34.4(a).