Banking and Finance Law Daily State law requiring interest payments on mortgage escrow not preempted by federal banking law
Wednesday, February 26, 2020

State law requiring interest payments on mortgage escrow not preempted by federal banking law

By Nicole D. Prysby, J.D.

A state law requiring interest payments on escrow sums for residential mortgages is not preempted by federal law or regulations.

A Maryland law requiring lenders to pay interest on escrow funds does not prevent or significantly interfere with a bank’s ability to conduct real estate loans, and is not preempted by federal law or regulations, held a federal district court in Maryland. A consumer sued Bank of America after the bank failed to pay interest on the escrow sums for her residential mortgage. Bank of America argued that the state law is preempted by the National Bank Act (NBA) or by Office of the Comptroller of the Currency regulations. But the court found that the Dodd-Frank Act requires national banks to pay interest on escrow accounts, when mandated by "applicable" state or federal law. The word "applicable" does not refer to preemption. And because the Maryland law does not prevent or significantly interfere with Bank of America’s exercise of its federal banking powers, it is not preempted. Therefore, the bulk of the consumer’s claims against Bank of America go forward (Clark v. Bank of America, N.A., Feb. 24, 2020, Gallagher, S.).

A consumer entered into a residential mortgage agreement with Bank of America via a Deed of Trust. The Deed of Trust provided that Bank of America would pay interest on escrowed funds if "Applicable Law requires interest to be paid on the Funds." Maryland law requires lenders to pay interest on funds maintained in escrow on behalf of borrowers, Md. Code Ann., Com. Law section 12-109. However, Bank of America has not paid interest to the consumer on the escrow account.

Preemption. Bank of America argued that the NBA and regulations from the OCC preempt section 12-109. The court rejected that argument. Under the Dodd-Frank Act, national banks are required to pay interest on escrow accounts, when mandated by applicable state or federal law. 15 U.S.C. section 1639d(g)(3). The OCC’s regulations state that "a national bank may make real estate loans without regard to state law limitations concerning escrow accounts." 12 CFR section 34.4(a)(6). The court found that the OCC regulation is entitled to minimal deference and that it is not clear that the OCC, in promulgating the regulations, ever considered whether the NBA preempts state laws that mandate payment of interest for escrow accounts. The OCC’s final rule is devoid of any mention of state escrow interest laws and when the OCC updated the regulations in 2011, it did not engage in a substantive reevaluation of preemption, in light of Dodd-Frank. Therefore, the court will not defer to the OCC’s regulation, or to the agency’s current position that section 12-109 is preempted.

The parties disputed the meaning of "applicable" state or federal law in Dodd-Frank. The court concluded that Congress did not refer to preemption. The better reading of section 1639d is that lenders should pay interest on escrow accounts when state laws requiring these payments are "relevant." The court reached this determination based upon the larger context of the statutory phrase, and upon other uses of "applicable" in the same statute. Accordingly, with the word "applicable," Congress "did not intend to create a preemption-based exception for national banks."

In any event, the court’s decision does not rest primarily on an interpretation of section 1639d. Rather, on the basis that section 12-109 does not prevent or significantly interfere with Bank of America’s exercise of its federal banking powers because section 12-109’s "interference" is minimal. The law merely provides that, if Bank of America chooses to maintain escrow accounts, then it must pay a small amount of interest to the borrowers on their funds. Bank of America’s suggestions about interference are belied by the fact that its direct competitors dutifully comply with section 12-109. Congress, in Dodd-Frank, expressed its judgment that national banks can and should adhere to statutes like section 12-109. Dodd-Frank changed the landscape of banking regulation and, in doing so, indicated that state statutes requiring payment of interest on escrow accounts are a viable means of consumer protection within the dual regime of federal and state regulation.

Other issues. The consumer’s breach of contract claim goes forward. Her claim for unjust enrichment also goes forward, because Bank of America is contesting liability under the written contract. Her Maryland Consumer Protection Act claim goes forward, based on her allegation that the periodic account statements sent to borrowers misstated the actual amounts owed. Her Truth in Lending Act claim is dismissed as time barred.

The case is No. 1:18-cv-03672-SAG.

Attorneys: Anna Claire Haac (Tycko & Zavareei, LLP) for Cynthia Clark. Andrew Soukup (Covington and Burling LLP) and David L. Permut (Goodwin Procter LLP) for Bank of America, N.A.

Companies: Bank of America, N.A.

MainStory: TopStory DoddFrankAct InterestUsury Loans MarylandNews Mortgages Preemption StateBankingLaws

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