Cantero v. Bank of America: An Explainer

What is this case about, and why is it important?  

The question at issue in Cantero v. Bank of America, decided May 30, 2024, was whether a national bank is required to follow a New York law that requires banks to make interest payments on mortgage escrow accounts. The case is important because the Supreme Court was deciding how lower courts should determine which state laws apply to the activities of national banks – and, specifically, the extent to which those laws may be preempted by federal law.

What is preemption?

Preemption is a legal concept based in the U.S. Constitution. It provides that federal law is the supreme law of the United States. National banks are organized under the National Bank Act, which was enacted in 1863 and grants national banks powers to operate and engage in the business of banking.[1] Since that time, federal preemption of state law has been recognized by Congress and the courts as necessary to accomplish the goals of the National Bank Act. In a seminal case, Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, 517 U.S. 25 (1996), the Supreme Court held that a state law is preempted where it “prevents or significantly interferes” with the national bank’s exercise of its powers. This standard was codified as one of the standards for preempting state consumer financial laws in the Dodd-Frank Act in 2010.

Did Cantero change the standard for National Bank Act preemption?

No. The decision points to the Supreme Court’s historical precedents and says courts should compare state laws with the laws that were at issue in those earlier cases to determine if they are preempted. Although both parties in the case asked the Court to adopt a clearer test for determining if a law is preempted, the Court declined to, stating that is not the type of test Congress adopted in Dodd-Frank when it incorporated the Barnett standard.

What did the Court say the Barnett standard requires?

In its Cantero decision, the Court said the Second Circuit had erred because it did not conduct the type of “nuanced comparative” preemption analysis that was necessary under Barnett, which involves “a practical assessment of the nature and degree of the interference caused by a state law.” The Court did not provide any bright-line test to determine if the “significantly interferes” standard is met. Rather, it said courts should assess whether a state law’s interference is “more akin” to the interference in cases where the Court found preemption or did not find preemption.

Did the Dodd-Frank Act adopt a higher preemption standard?

No. The Cantero decision confirms that the Dodd-Frank Act did not substantively change the standard for preemption of state consumer financial laws, as some commentators have argued. The Court explains: “Because we conclude that Dodd-Frank adopted Barnett Bank, and because Barnett Bank was also the governing preemption standard before Dodd-Frank, the timing of Cantero’s mortgage agreement does not affect the preemption analysis here.

Will courts need to do a factual, bank-specific analysis to determine if a law is preempted?

Probably not. The Court clearly rejects the plaintiff borrowers’ very narrow view of the preemption standard (i.e., discovery and evidence must show that the state law at issue imposes a high degree of burden on a bank to be preempted). Although the decision says courts should do a nuanced, comparative analysis between the state law at issue and laws that the Supreme Court has previously found to be preempted (or not), an important footnote suggests detailed factual findings are not necessary: “In Barnett Bank and each of the earlier precedents, the Court reached its conclusions about the nature and degree of the state laws’ alleged interference with the national banks’ exercise of their powers based on the text and structure of the laws, comparison to other precedents, and common sense.”

Will this affect the OCC’s existing preemption rules?

The opinion does not address the OCC’s rules. It only says the circuit court may consider the significance of the OCC’s rules (if any) on remand. But the decision’s reasoning is consistent with the OCC’s longtime position, incorporated into its rules, that “the Dodd-Frank Act does not create a new, stand-alone ‘prevents or significantly interferes’ preemption standard, but rather, incorporates the conflict preemption legal standard and the reasoning that supports it in the Supreme Court’s Barnett decision.” (76 Fed. Reg. 43549, 43555) The Cantero decision goes further by saying Dodd-Frank incorporated “similar precedents” along with Barnett Bank: “Given Dodd-Frank’s direction to identify significant interference ‘in accordance with’ Barnett Bank, courts addressing preemption questions in this context must do as Barnett Bank did and likewise take account of those prior decisions of this Court and similar precedents.”

What else did the Court say about preemption?

The opinion is brief, but it reiterated that federal law’s “grants of both enumerated and incidental ‘powers’ to national banks” are “grants of authority not normally limited by, but rather ordinarily pre-empting, contrary state law.” The opinion also points to the Supreme Court case National Bank of Franklin Square v. New York, 347 U.S. 373 (1954), as “the paradigmatic example of significant interference.” There, a New York state law barring banks from using the word “savings” in their advertising was preempted because it interfered with the national bank’s ability to conduct its business “efficiently”—arguably a relatively limited degree of interference.

What happens next?

The specific question at issue in this case—whether the New York mortgage escrow interest law is preempted—was sent back to the Second Circuit for reconsideration consistent with this decision.

Going forward, courts will probably analyze state laws on a case-by-case basis to decide if the degree of interference of the at-issue law bears a closer resemblance to the cases where the Supreme Court found the law was preempted, or alternatively, a closer resemblance to cases where the Supreme Court found the law not to be preempted.

Bottom line: Cantero reiterates the Supreme Court’s earlier preemption decisions that turn on the degree of interference a state law has on a national bank’s powers.

[1] National banks operate pursuant to a federal charter issued by the Office of the Comptroller of the Currency, an office within the U.S. Department of the Treasury. By contrast, state banks operate under a charter issued pursuant to relevant state banking law. The “business of banking” is generally defined to encompass deposit-taking, lending and payments activities.