Hymes v. Bank of America

Summary

The District Court’s order in Hymes v. Bank of America, N.A., 408 F. Supp. 3d 171 (E.D.N.Y. 2019) (“Order”), amended, 2020 WL 9174972 (Sept. 29, 2020), dramatically alters a fundamental rule of law that had been decisively stated in multiple cases by the U.S. Supreme Court: the National Bank Act (“NBA”) preempts states from regulating the rates and terms of a national bank’s products and services.3 Contrary to this well-established rule, the District Court held that New York General Obligations Law (“NYGOL”) § 5-601, which requires lenders to pay a designated rate of interest on all mortgage escrow accounts, is not preempted by the NBA. The District Court reached this conclusion without any analysis of the importance of national banks’ ability to set rates and terms for their products and services in general, or for mortgage escrow accounts in particular.

Rather, substituting its own economic analysis (which was based on no factual record) for that of national banks and their expert federal regulator, the District Court reached the unsupported conclusion that NYGOL § 5-601’s “degree of interference” with national banks’ power “is minimal.” Hymes, 408 F. Supp. 3d at 195. This Order reflects a basic misunderstanding of the NBA’s history and goals and binding precedent.

Congress enacted the NBA in 1864 so that federal law—rather than “unduly burdensome and duplicative state regulation”—would govern national banks. Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10–11 (2007). At the foundation of the national banking system, Congress established that national banks would operate under the “paramount authority” of the federal government, Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896), and be supervised by the Office of the Comptroller of the Currency (“OCC”), see Act of June 3, 1864, § 8, 13 Stat. 99, 101 (1864) (codified at 12 U.S.C. § 24). As the Supreme Court explained, “we are unable to perceive that Congress intended to leave the field open for the states to attempt to promote the welfare and stability of national banks by direct legislation.” Easton v. Iowa, 188 U.S. 220, 231–32 (1903).

Soon after Congress enacted the NBA, the Supreme Court began establishing the broad parameters of the NBA’s preemption of state law, consistently holding that state attempts to “control” national banks’ powers are impermissible, “except in so far as Congress may see proper to permit.” Farmers’ & Mechs.’ Nat’l Bank v. Dearing, 91 U.S. 29, 34 (1875). For well over a century, decisions of the Supreme Court and various federal courts of appeals have recognized that “[n]ational banks are instrumentalities of the federal government,” Davis, 161 U.S. at 283, and that states “may not curtail or hinder a national bank’s efficient exercise” of its powers “under the NBA,” Watters, 550 U.S. at 13. Thus, “[i]n the years since 5 the NBA’s enactment,” the Supreme Court has “repeatedly made clear that federal control shields national banking from unduly burdensome and duplicative state regulation.” Watters, 550 U.S. at 11.

In the landmark case of Barnett Bank of Marion County, N.A. v. Nelson, the Supreme Court set out a standard that any state regulation that “prevent[s] or significantly interfere[s] with [a] national bank’s exercise of its powers” is preempted. 517 U.S. 25 (1996). Barnett Bank is the standard Congress later codified as part of the Dodd-Frank Act, 12 U.S.C. § 25b(b)(1)(B). Importantly, the “level of interference that gives rise to preemption” under Barnett Bank “is not very high.” Monroe Retail, Inc. v. RBS Citizens, N.A., 589 F.3d 274, 283 (6th Cir. 2009) (internal quotation marks omitted); cf. Franklin Nat’l Bank of Franklin Square v. New York, 347 U.S. 373, 378–79 (1954) (state-law prohibition on the use of the word “savings” in advertising was preempted as to national banks due to its interference with incidental banking powers).

NYGOL § 5-601 is a prime example of the type of state interference with national bank powers that the NBA has long preempted. Banks created mortgage escrow accounts in the mid-1900s as a key tool to protect both homeowners and banks by establishing a mechanism for homeowners to pay their tax and insurance bills in a timely manner, and thus protect their homes from tax seizures or uninsured catastrophe. National banks rely on these accounts to help 6 manage their credit risk on multiple millions of mortgages across the United States. Since the advent of these accounts, national banks have relied on the NBA and OCC regulations to protect their ability to set the rates of interest on the billions of dollars held in those accounts from a mishmash of different state laws and regulations.

The New York-mandated 2% interest rate—which is almost six times the current market rate4—constitutes a significant interference with national banks’ use of mortgage escrow accounts. Not only is the law a per se violation of a national bank’s core power to set the rates and prices of lending products and accounts, but if national banks are forced to pay state-mandated interest on escrow accounts, much less a dramatically above-market rate of interest, they will need to balance this requirement by charging higher rates on mortgages or reducing the availability of mortgages to lower-credit borrowers (whose credit would already be at the outer edge of acceptable risk). Moreover, national banks would be subjected to a patchwork of fifty different state regulatory regimes concerning mortgage escrow accounts, thus defeating the NBA’s purpose of a uniform national regulatory structure for national banks.

Accordingly, this Court should reverse the District Court’s Order and hold that the NBA preempts NYGOL § 5-601.

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