Second Circuit Reaffirms Preemption of New York Escrow-Interest Law

Overview

• The Second Circuit, which ruled Tuesday on remand in Cantero v. Bank of America, held that New York’s 2% interest-on-escrow law is preempted for national banks that hold borrower funds to pay taxes and insurance.
• The majority said the statute targets banks by fixing a 2% return on escrow balances, limiting their ability to set account terms and to make home loans efficiently under federal powers.
• Citing Supreme Court precedents, the panel likened the law’s effect to earlier state rules struck down for curbing bank pricing and advertising, including Franklin National Bank.
• Judge Myrna Pérez dissented, saying a 2% payment on typically small escrow sums would not meaningfully change banks’ incentives or consumer access to mortgages, and she pointed to TILA’s treatment of escrow interest.
• Conflicting rulings in the First and Ninth Circuits keep similar state escrow-interest mandates in force elsewhere, leaving multi-state lenders to manage different rules across roughly a dozen states and teeing up possible en banc or Supreme Court review as the OCC’s related proposal sits in the background.