Ninth Circuit Rejects Bank of America’s Dodd-Frank Preemption Argument and Allows Class Action for Violation of California’s Mortgage Escrow Law Requiring Interest Payments to Proceed

The Ninth Circuit Court of Appeals recently ruled that California resident Donald Lusnak can proceed with a proposed class action against Bank of America for its failure to pay interest on mortgage escrow accounts. The Court’s unanimous three judge panel decision rejected Bank of America’s argument that the National Banking Act preempted California’s state escrow law, which was enacted in 1976, is found in section 2954.8(a) of the California Civil Code and requires financial institutions to pay borrowers at least two percent annual interest on the funds held in the borrowers’ escrow accounts. Plaintiff sued Bank of America because it does not pay borrowers any interest on the positive balance in their escrow accounts.

The Ninth Circuit’s ruling reversed the district court’s dismissal of the putative class action, which concluded that California’s escrow interest law prevents or significantly interferes with banking powers and therefore is preempted by the National Banking Act that was enacted in 1864 and established a dual banking system. The Ninth Circuit noted that the United States Supreme Court has often ruled on the scope of state authority to regulate national banks and that Congress has enacted legislation to prevent inconsistent intrusive state regulation from impairing the national system The Ninth Circuit explained that Dodd-Frank merely codified the existing preemption standard, which is that state consumer financial law is preempted only if it prevents or significantly interferes with the exercise by the national bank of its powers. The Ninth Circuit examined Dodd-Frank’s requirement in 15 U.S.C. section 1639d(g)(g)(3) that a creditor pay interest to the consumer on the amount held in an escrow account if doing so is prescribed by applicable state or federal law and held that the National Banking Act did not preempt California’s escrow law.

If you make or service loans secured by property in California and would like to discuss the Ninth Circuit’s recent ruling, AMLG encourages you to contact Matt Haddock or Jack Valinoti.