Cantero v. Bank of America, N. A.
The Supreme Court unanimously threw out a Second Circuit ruling that had blocked New York's law requiring banks to pay interest on mortgage escrow accounts, finding the lower court used an overly broad test that would wipe out nearly all state banking regulations.
The decision does not settle whether New York's interest rule actually applies to Bank of America — it only sends the case back with instructions to use a more careful, case-by-case comparison rather than a blanket categorical rule.
“A court applying that Barnett Bank standard must make a practical assessment of the nature and degree of the interference caused by a state law.”
The Court describes the case-by-case test that lower courts must use when deciding whether federal banking law overrides a state rule.
How it got here: A federal district court ruled the New York interest law was not preempted; the Second Circuit reversed; the Supreme Court agreed to hear the homeowners' appeal.
The Case in Depth
What happened
Two sets of New York homeowners took out mortgage loans from Bank of America and were required to maintain escrow accounts to cover property taxes and insurance. New York law requires banks to pay at least 2% annual interest on those escrow balances, but Bank of America paid nothing, telling the borrowers that federal banking law wiped out the state requirement. The homeowners filed class-action lawsuits seeking the unpaid interest.
The question before the Court
Does federal law automatically block a New York rule requiring banks to pay interest on mortgage escrow accounts, just because national banks have a federally granted power to operate those accounts?
The Court's answer
Not yet — the Court unanimously sent the case back without deciding whether New York's interest-on-escrow rule is actually blocked by federal law. The Second Circuit had applied an overly broad test, ruling that any state law "exerting control over" a federally granted banking power is automatically preempted. The Supreme Court rejected that approach as flatly inconsistent with what Congress required in the Dodd-Frank Act of 2010, which says federal law only overrides a state banking rule when the state law "prevents or significantly interferes" with the national bank's federally authorized powers — a standard deliberately drawn from the Court's 1996 Barnett Bank decision.
Under the correct approach, a court must make a practical, case-by-case judgment: does New York's interest rule burden Bank of America's escrow operations as heavily as the state laws that were blocked in earlier cases (like New York's ban on savings-deposit advertising in 1954), or is it more like the permissible state rules — such as Kentucky's abandoned-deposit law — that courts have long upheld? The Second Circuit must now redo its analysis using that nuanced comparison.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
New York homeowners with escrow accounts at national banks remain in legal limbo about whether they are owed interest payments. More broadly, the ruling shapes how courts across the country must analyze when federal banking law overrides state consumer-protection rules — a framework that could affect bank customers in any state with laws that go beyond what federal law requires.
What changes now
The case returns to the Second Circuit, which must now analyze whether New York's interest-on-escrow law significantly interferes with Bank of America's escrow powers under the nuanced Barnett Bank framework. The lower court may also address two issues it had not yet reached: whether federal banking regulator rules matter here, and whether a separate Dodd-Frank provision independently preempts the New York law. No final answer on Bank of America's liability has been issued.
What this does not decide
The Court expressly did not decide whether New York's interest-on-escrow law is actually preempted as to Bank of America — that question remains open on remand. The ruling also leaves unresolved the role of federal banking regulator (OCC) preemption rules and a separate Dodd-Frank preemption provision, both noted in a footnote as issues for the lower court.
How the Court got there
The legal reasoning, step by step
- The Dodd-Frank Act of 2010 — a major financial-reform law passed after the 2008 financial crisis — controls when federal banking law overrides state regulations. It rules out blanket federal takeover of the field and says federal law preempts a state banking rule 'only if' the state law either discriminates against national banks or 'prevents or significantly interferes' with a national bank's federally authorized powers — measured 'in accordance with' the Court's 1996 decision in Barnett Bank of Marion County, N.A. v. Nelson.
- Barnett Bank established that a state law can be preempted even if the bank could technically comply with both laws simultaneously. It emphasized that Congress's grants of power to national banks are 'ordinarily pre-empting' as to contrary state law — so a state may not significantly impair a power Congress explicitly granted, even without outright forbidding it. But Barnett Bank drew no bright line; instead it surveyed earlier cases as guideposts for what counts as significant interference.
- On the 'preempted' side of the line, Barnett Bank pointed to Franklin National Bank v. New York (1954) — where New York could not stop national banks from using the word 'savings' in advertising, because that interfered with the banks' federally granted power to receive savings deposits — and Fidelity (1982), where California could not restrict when savings and loans could exercise due-on-sale mortgage clauses, because it stripped away 'flexibility given' by federal law.
- On the 'not preempted' side, Barnett Bank pointed to Anderson v. Luckett (1944) — where Kentucky could require banks to turn over abandoned deposits to the state without interfering with deposit-taking, because paying depositors on demand is already an 'inseparable incident' of the deposit power — and to cases upholding generally applicable state contract and tax laws as routine regulation of banks' 'daily course of business.'
- The Second Circuit skipped this comparative analysis entirely and instead applied a categorical rule: any state law that 'purports to exercise control over' a federally granted banking power is automatically preempted, regardless of how minor its actual effect. The Court rejected this as inconsistent with Dodd-Frank's 'only if' language and with Barnett Bank's deliberate refusal to draw a bright preemption line.
- A proper analysis requires a practical assessment of the nature and degree of the state law's interference, comparing it to the spectrum of examples Barnett Bank catalogued. Courts must ask whether the interference is more like the serious impairments in Franklin, Fidelity, and Barnett Bank (preempted), or more like the modest, incidental burdens in Anderson and the general-business-law cases (not 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 preemption standard, now expressly incorporated into federal law by Dodd-Frank.
Reaffirms Franklin National Bank of Franklin Square v. New York (347 U.S. 373)
Reaffirmed as a paradigm example of state interference significant enough to preempt federal banking powers.
Reaffirms Anderson National Bank v. Luckett (321 U.S. 233)
Reaffirmed as the primary example of permissible state regulation that does not significantly interfere with national bank powers.