Banking and Finance Law Daily California’s interest-on-escrow law preempted by HOLA for loans acquired by national bank
Wednesday, September 23, 2020

California’s interest-on-escrow law preempted by HOLA for loans acquired by national bank

By Nicole D. Prysby, J.D.

The Home Owners’ Loan Act applies to claims against a national bank when that bank has acquired a loan executed by a federal savings association.

The Home Owners’ Loan Act (HOLA) field preemption principles applied to claims against a national bank, even though the conduct giving rise to the complaint occurred after the bank acquired the loans in question from a federal savings association, held the Ninth Circuit Court of Appeals. California consumers sued the national bank, arguing that after the bank acquired their residential mortgages from a federal savings association, they should have received interest on any funds held in escrow under California’s interest-on-escrow law. But the Ninth Circuit held that multiple HOLA regulations preempted the California law. California’s interest-on-escrow law imposed a requirement regarding escrow accounts; affected the terms of sale, purchase, investment in, and participation in loans originated by savings associations; and had more than an incidental effect on the lending operations of savings associations, thus it was preempted by 12 CFR 560.2(b)(6), 560.2(b)(10), and 560.2(c) of the HOLA implementing regulations (McShannock v. JP Morgan Chase Bank NA, September 22, 2020, Nelson, R.).

Background. California consumers obtained residential home mortgages from Washington Mutual Bank, FA (WaMu) in 2005-2007. Under California law, the consumers would normally have been entitled to "at least 2 percent simple interest per annum" on any funds held in escrow under California’ interest-on-escrow law. But WaMu, as a federal savings association organized and regulated under HOLA, was not required to pay interest because HOLA and its implementing regulations preempted California law. In 2008, Chase Bank, a national bank organized and regulated under the National Bank Act (NBA), assumed all of WaMu’s mortgage servicing rights and obligations. Since the NBA does not preempt California’s interest-on-escrow law, the consumers brought a class action against Chase. Chase moved to dismiss the claims on the basis that because the mortgages were initially issued by WaMu, Chase was not required to pay interest. The district court held that although the mortgages were issued by WaMu, HOLA preemption no longer applied because the complaint sought redress only for Chase’s nonpayment of escrow interest after it acquired WaMu’s assets. Chase appealed.

HOLA preempts California escrow law. The court held that HOLA preempts California’s interest-on-escrow law for loans issued by WaMu that were later assigned to Chase. The language of the implementing regulations (that the Office of Thrift Supervision, OTS, "is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate") led the court to conclude that field preemption principles extend to all state laws affecting a federal savings association, without reference to whether the conduct giving rise to a state law claim is that of a federal savings association or of a national bank. In addition, the precursor to the OTS implemented a regulation preempting "any state law purporting to address the subject of a Federal association’s ability or right to... sell" mortgages or "directly or indirectly to restrict such ability or right" (12 CFR 545.6(a)(2)). The court deferred to the regulations and found that they supported applying field preemption. Although there is nothing in the text or the legislative history of HOLA that references the transfer of loans from a federal savings association in a secondary market, HOLA’s subsequent amendment and implementing regulations support applying field preemption.

Although a secondary market for mortgage loans did not exist at the time HOLA was adopted in 1933, Congress created Fannie Mae and Freddie Mac in 1938, establishing and expanding the secondary market for loans. Congress also amended HOLA to to allow savings associations to sell loans into the secondary market. Thus, there is little doubt that Congress intended HOLA to cover the sale of mortgages belonging to federal savings associations.

Applying the established HOLA preemption framework, the court concluded that the California law is preempted. 12 CFR 560.2(b)(6) preempts state laws purporting to impose requirements regarding escrow accounts; California’s law is certainly a requirement regarding escrow accounts. The California law is also preempted by section 560.2(b)(10) because it affects the sale, purchase of, investment in, and participation in loans originated by savings associations. Also, section 560.2(c) preempts California’s interest-on-escrow law as well, because application of the law would have more than an "incidental effect on the lending operations of" savings associations. Allowing states to impose requirements on loans originated by savings associations would impede the securitization of those loans by creating substantial uncertainty for buyers in the secondary market about the applicable law governing the loans they are purchasing and imposing substantial compliance costs on secondary buyers.

Dissent. Justice Gwen dissented, and would have held that HOLA’s text and implementing regulations do not support preemption, and that California is not otherwise preempted from requiring banks to pay nominal interest on escrow account balances.

The case is No. 19-15899.

Attorneys: Glenn A. Danas (Robins Kaplan LLP) for Susan McShannock. Alexander J. Gershen (McGuireWoods LLP) and Noah A. Levine (Wilmer Cutler Pickering Hale and Dorr LLP) for JPMorgan Chase Bank NA, d/b/a Chase Bank.

Companies: JPMorgan Chase Bank NA, d/b/a Chase Bank

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