Second Circuit Holds State Mortgage-Escrow Interest Laws Are Preempted by Federal Law

On May 5, 2026, in Cantero v. Bank of America, N.A., the U.S. Court of Appeals for the Second Circuit issued a 2-1 decision holding that New York General Obligations Law (“GOL”) § 5-601—which requires banks to pay at least two percent interest on mortgage-escrow accounts—is preempted by the National Bank Act (“NBA”) as applied to national banks.[1] The decision is the first circuit court finding preemption of state mortgage-escrow interest requirements since the Supreme Court’s May 2024 decision in Cantero, which vacated the Second Circuit’s earlier ruling and remanded with instructions to conduct a “nuanced comparative analysis” of the state law against the Court’s preemption precedents.[2]

The Second Circuit’s decision directly conflicts with the First Circuit’s 2025 decision in Conti v. Citizens Bank, N.A., which held that a substantially similar Rhode Island interest-on-escrow law was not preempted by the NBA.[3] It also conflicts with the Ninth Circuit’s recent mortgage escrow decision in Kivett v. Flagstar Bank, FSB, although that court rested its holding on different grounds—namely, that it was bound by prior circuit precedent rather than conducting a fresh analysis under the Cantero framework.[4] The resulting circuit split reflects the absence of definitiveness in the Supreme Court’s Cantero decision and may warrant Supreme Court review.

Background

On May 30, 2024, in a unanimous opinion authored by Justice Kavanaugh, the U.S. Supreme Court issued its first decision on NBA preemption of state law since Congress codified the Barnett Bank preemption standard in the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The Supreme Court directed lower courts to determine whether state laws are preempted based on a “practical assessment” of whether the state law “prevents or significantly interferes with” a national bank’s powers.[5] The Court instructed lower courts to make this determination by comparing the state laws at issue to those the Supreme Court had previously analyzed in its preemption decisions.[6]

The Supreme Court rejected both the Second Circuit’s original “control” test—which it characterized as “a categorical test that would preempt virtually all state laws”—and the plaintiffs’ position, which “would yank the preemption standard to the opposite extreme, and would preempt virtually no non-discriminatory state laws that apply to both state and national banks.”[7] The Court explained that in Barnett Bank and its earlier precedents, it had assessed “the nature and degree of the state laws’ alleged interference” based on “the text and structure of the laws, comparison to other precedents, and common sense.”[8]

The Supreme Court further instructed that “[i]f the state law’s interference with national bank powers is more akin to the interference in cases like Franklin, Fidelity, First National Bank of San Jose, and Barnett Bank itself, then the state law is preempted.”[9] But “[i]f the state law’s interference with national bank powers is more akin to the interference in cases like Anderson, National Bank v. Commonwealth, and McClellan, then the state law is not preempted.”[10] The Court noted the “desire by both parties for a clearer preemption line one way or the other” but reasoned that “Congress expressly incorporated Barnett Bank into the U.S. Code” and that “Barnett Bank did not draw a bright line.”[11] The Court then vacated the Second Circuit’s decision and remanded for this “nuanced comparative analysis.”[12]

Following the Supreme Court’s Cantero decision, both the First and Ninth Circuits ruled that state mortgage-escrow interest laws are not preempted by the NBA. In September 2025, the First Circuit held in Conti v. Citizens Bank, N.A. that Rhode Island’s interest-on-escrow law was not preempted, concluding that the law did not “significantly interfere” with national banking powers.[13] Citizens Bank filed a petition for a writ of certiorari, which the Supreme Court denied. Later in 2025, the Ninth Circuit reached the same result for California’s similar law in Kivett v. Flagstar Bank, FSB, though it relied on its pre-Cantero ruling in Lusnak v. Bank of America, N.A. rather than conducting a fresh analysis under the Cantero framework.[14]

The Second Circuit’s Decision on Remand

The Second Circuit conducted the comparative analysis the Supreme Court instructed and again concluded that New York’s interest-on-escrow law is preempted. Writing for the majority, Judge Park explained that the court analyzed two factors: “(1) the ‘nature’ of the state law’s interference, and (2) the ‘degree’ of interference,” comparing each against the Supreme Court’s preemption precedents.[15]

Nature of Interference. The Second Circuit found that New York’s law is not “generally applicable.”[16] Rather, GOL § 5-601 targets banks and limits their broad power to set the terms of mortgage-escrow accounts.[17] The court noted that federal law—through the Real Estate Settlement Procedures Act’s (“RESPA”) extensive regulation of escrow accounts without mandating interest payments, and the Truth in Lending Act’s (“TILA”) express incorporation of state interest-on-escrow requirements only for certain mortgages not at issue—suggests that Congress granted national banks broad power to set interest rates on most mortgage-escrow accounts.[18] This makes the nature of the interference “akin” to the Supreme Court’s prior decisions finding preemption where federal statutes explicitly granted broad express powers that state laws impermissibly limited.[19]

Degree of Interference. The court found that New York’s law interferes with banks’ ability to offer mortgage-escrow accounts “efficiently,” as it “may cause national banks to ‘offer escrow accounts on fewer real estate loans; attempt to recoup costs in other ways; or even reduce lending.’”[20] The court likened this interference to that caused by New York’s advertising law in Franklin National Bank of Franklin Square v. New York. Just as the Franklin law limited national banks’ ability to advertise savings accounts—described as “one of the most usual and useful of weapons”[21] to solicit deposits—GOL § 5-601 limits banks’ ability to set the terms of mortgage-escrow accounts, which the court called “a core component of banks’ mortgage lending powers.”[22]

The court observed that, if anything, GOL § 5-601 involves a more severe limitation than the Franklin law because “a state law that alters a national bank’s pricing almost by definition interferes more with the bank’s powers than a simple advertising restriction.”[23] The court further noted that the two-percent floor far exceeds prevailing interest rates on certificates of deposit, which ranged from only 0.16% to 0.91% between 2010 and 2020,[24] underscoring the magnitude of the interference.

In dissent, Judge Pérez, who had joined the majority opinion in the initial Cantero decision, argued that New York’s two-percent interest-on-escrow requirement does not “significantly interfere” with national banking powers. Judge Pérez criticized the majority for adopting an approach “just as capacious” as the control test the Supreme Court rejected, warning that the majority’s reasoning would leave states with little room to regulate national banks.[25] In Judge Pérez’s view, common sense indicates that a two-percent interest requirement imposes only a marginal burden and does not materially distort banks’ incentives to offer mortgages or escrow accounts.[26]

Implications

The Second Circuit’s decision is significant for several reasons:

Circuit Split. The decision creates a clear circuit split on the merits following the Supreme Court’s 2024 Cantero decision. The Second Circuit now holds that state mortgage-escrow interest requirements are preempted by the NBA, directly conflicting with the First Circuit’s holding in Conti on both the merits and outcome. The decision also conflicts with the Ninth Circuit’s result in Kivett, although that court relied on purportedly binding circuit precedent rather than conducting a fresh analysis under the Cantero framework. This circuit split may warrant Supreme Court review to resolve the question definitively.

Impact on State Interest-on-Escrow Laws. At least 12 states—including California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin—have laws requiring banks to pay interest on mortgage-escrow accounts.[27] The Second Circuit’s decision calls into question the validity of these laws as applied to national banks. Banks operating in the Second Circuit (covering New York, Connecticut, and Vermont) now have a clear basis for asserting preemption of these requirements.

OCC Proposed Rules. In December 2025, the OCC issued two notices of proposed rulemaking addressing this issue. The first would recognize national banks’ longstanding authority to set the terms of mortgage-escrow accounts, including whether to pay interest.[28] The second would issue a formal preemption determination concluding that the NBA preempts New York’s law and similar laws in 11 other states.[29] The Second Circuit noted the OCC’s position, although it did not rely on the proposed rules, which had not been finalized at the time of the decision.

Broader NBA Preemption Implications. The Second Circuit’s two-part analytical framework, examining both the “nature” and “degree” of interference with national bank powers by comparing the state law to Supreme Court precedents, provides valuable guidance for analyzing NBA preemption in other contexts. The decision suggests that state laws restricting national banks’ pricing of products or services are likely to be preempted under the Second Circuit’s analytical framework.