Cantero v. Bank of America, N. A.
The Supreme Court threw out a federal appeals court ruling that had blocked New York's law requiring banks to pay interest on mortgage escrow account balances, finding the appeals court used the wrong legal test.
The decision does not settle whether New York's law actually applies to national banks — it sends the case back to be decided again using a more careful, case-by-case analysis of how much the state law interferes with the bank's federally authorized powers.
How it got here: A federal district court ruled for the borrowers; the Second Circuit reversed, finding the New York law preempted; the Supreme Court agreed to hear the case and vacated the Second Circuit's ruling.
The Case in Depth
What happened
Bank of America, a federally chartered national bank, required its New York mortgage customers to make monthly deposits into escrow accounts to cover property taxes and insurance premiums. New York state law requires banks holding those escrow balances to pay borrowers at least 2% annual interest. Bank of America refused to pay that interest, claiming federal banking law overrode the state requirement. The affected borrowers brought class-action lawsuits against the bank.
The question before the Court
Can New York require a federally chartered bank like Bank of America to pay interest on mortgage escrow accounts, or does federal banking law block that requirement?
The Court's answer
Neither yes nor no — not yet. The Court ruled that the federal appeals court used the wrong legal standard when it decided that federal law blocked New York's interest-on-escrow requirement, and sent the case back to be analyzed correctly.
The right test — set by Congress in the 2010 Dodd-Frank Act, which expressly incorporated a 1996 Supreme Court decision called Barnett Bank — asks whether the state law "prevents or significantly interferes" with a bank's federally authorized powers. That test requires a nuanced, case-by-case comparison to a body of prior court decisions, not the sweeping categorical rule the appeals court applied. The appeals court's approach would have preempted nearly every state banking regulation that touches a national bank's federally granted powers, which is broader than Congress intended.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Millions of New York mortgage borrowers may eventually be entitled to at least 2% annual interest on money held in their escrow accounts — but that question remains open. The ruling also sets the framework courts across the country must use when deciding whether other state consumer-banking protection laws are overridden by federal rules, affecting borrowers and banks in every state.
What changes now
The case returns to the Second Circuit, which must now apply the correct comparative, case-by-case standard to decide whether New York's interest-on-escrow law significantly interferes with Bank of America's federally authorized powers. On remand, the appeals court may also address two issues not yet resolved: whether federal regulations from the Office of the Comptroller of the Currency affect the outcome, and whether a separate Dodd-Frank preemption provision applies. The underlying question — whether New York borrowers are owed interest — remains unsettled.
What this does not decide
The Court does not decide whether New York's interest-on-escrow law is actually preempted — that question goes back to the appeals court. The ruling also leaves open the role of federal banking regulations from the Office of the Comptroller of the Currency and a separate Dodd-Frank preemption provision that neither court below had addressed.
How the Court got there
The legal reasoning, step by step
- The starting point is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which Congress passed to clarify when federal banking law overrides state consumer financial laws. Dodd-Frank explicitly ruled out so-called field preemption — the idea that federal law automatically displaces all state regulation of national banks. Instead, federal law overrides a state banking rule only if that rule discriminates against national banks or 'prevents or significantly interferes' with a bank's federally authorized powers.
- New York's interest-on-escrow law applies equally to state-chartered and nationally chartered banks, so it doesn't discriminate. The only question is whether requiring Bank of America to pay interest on escrow balances 'significantly interferes' with its federally authorized power to administer home mortgage loans — and Dodd-Frank says that question must be answered 'in accordance with' the Court's 1996 Barnett Bank decision.
- Barnett Bank (which held that a Florida law blocking a national bank from selling insurance was preempted) deliberately avoided drawing a bright-line rule. Instead, it surveyed earlier Supreme Court decisions to map out a spectrum: on the preempted side sat cases where state laws meaningfully blocked or impaired federal banking powers (Franklin National Bank, Fidelity Federal, and Barnett Bank itself); on the permissible side sat cases where state laws governed ordinary business operations without undermining the banks' core functions (Anderson National Bank, National Bank v. Commonwealth, McClellan v. Chipman).
- The key distinction running through those cases is the practical degree of interference. State laws were preempted when they prevented banks from effectively exercising a specifically granted federal power — for example, stopping a bank from using the word 'savings' in advertising when Congress had specifically authorized it to receive savings deposits. State laws were upheld when they regulated banks' day-to-day conduct in the same way they regulated other businesses, without impairing the bank's efficiency in carrying out its federal functions.
- Rather than performing this comparative, fact-specific assessment, the Second Circuit applied a categorical rule derived from McCulloch v. Maryland: any state law that 'purports to exercise control' over a federally granted banking power is automatically preempted, regardless of how much it actually interferes. That approach would sweep away virtually all targeted state banking consumer-protection laws — far more than Barnett Bank or Dodd-Frank allows.
- Because Congress expressly built the Barnett Bank standard into Dodd-Frank, the appeals court must redo its analysis — weighing the nature and degree of New York's interference with Bank of America's escrow-account powers against the spectrum of prior cases — before deciding whether the state law is preempted.
Doctrinal impact
Cases affected by this decision
Reaffirms Barnett Bank of Marion Cty., N. A. v. Nelson (517 U. S. 25)
Confirmed as the governing standard — incorporated by Congress into Dodd-Frank — for deciding when federal banking law overrides state rules.
Reaffirms Franklin National Bank of Franklin Square v. New York (347 U. S. 373)
Cited as the clearest example of a state law that significantly interferes with a national bank's federally granted powers.
Reaffirms Anderson National Bank v. Luckett (321 U. S. 233)
Cited as the primary example of a state banking rule that does not significantly interfere and therefore is not preempted.