National Bank Act Preemption Flagstar v Kivett

Section 1044 of the Dodd-Frank Act codified the NBA preemption standard from the Supreme Court’s decision in Barnett Bank of Marion County N.A. v. Nelson, 517 U.S. 25 (1996), ruling the NBA preempts state law if it “prevents or significantly interferes with the exercise of a national bank’s power.”

Flagstar loaned $400,610 to William Kivett to finance a 2012 real estate purchase in California. Kivett filed a class action alleging that Flagstar failed to pay interest on his mortgage escrow account. Flagstar contended, however, that the NBA preempts state laws requiring national banks to pay interest on mortgage escrow accounts. A California federal district court ruled the NBA did not preempt California’s IOE law, and on May 17, 2022, a Ninth Circuit panel affirmed, citing its prior Lusnak decision that rejected the preemption challenge to California’s IOE law. In Lusnak, the Ninth Circuit ruled that California's IOE law did not significantly interfere with national banking powers under the NBA because Congress contemplated state IOE requirements and national banks could comply with those laws without impairing their federally authorized lending authority.

On May 30, 2024, the U.S. Supreme Court decided Cantero v. Bank of America, directing courts to practically assess how much a state regulation interferes with a national bank’s powers under Barnett Bank. The Court then granted Flagstar’s certiorari petition, vacated the Ninth Circuit's decision, and remanded the case.

On remand, a unanimous Ninth Circuit panel initially reaffirmed the district court, ruling the NBA does not preempt California’s IOE law, citing Lusnak and concluding Cantero supported that analysis. After the Ninth Circuit granted rehearing and vacated that decision on December 24, 2024, ABA filed a coalition amicus brief supporting Flagstar and urged the panel to reverse the district court’s decision. On October 2, 2025, the Ninth Circuit again ruled that the NBA does not preempt the law, with Judge Jay Bybee writing for the majority that Cantero was not “clearly irreconcilable” with Lusnak.

On November 17, 2025, Flagstar filed an en banc petition (full panel review), arguing a rehearing is warranted to align the Ninth Circuit’s precedent with Cantero and clarify the Ninth Circuit’s clear irreconcilability standard. On Nov. 26, 2025, ABA filed a coalition amicus brief arguing a rehearing is warranted because the issue of whether the NBA preempts California’s IOE law is exceptionally important, and Lusnak, which the Ninth Circuit panel previously relied on, cannot be squared with the U.S. Supreme Court’s decision in Cantero. However, on November 26, 2025, a Ninth Circuit panel denied Flagstar’s petition to review its prior decision. Consequently, Flagstar petitioned the U.S. Supreme Court for review.

In its brief, ABA made three main arguments. First, ABA argued that courts remain divided over how to apply Cantero. Although the First and Second Circuits agreed that Cantero requires a case-specific analysis of whether a state law interferes with a national bank’s powers, they reached opposite conclusions on similar IOE laws. The Ninth Circuit, however, relied on its pre-Cantero decision in Lusnak rather than applying the framework that Cantero requires. These conflicting approaches have created a circuit split, left national banks without a consistent preemption standard, and justified Supreme Court review.

Second, ABA argued the question of whether the NBA preempts California’s IOE law is of exceptional importance and warrants the Court’s immediate review. Mortgage escrow accounts play a vital role in the residential mortgage market by helping borrowers pay property taxes and insurance while protecting lenders' collateral. ABA stressed that California’s IOE law limits national banks' authority to set prices for their products, conflicts with Congress’s decision not to require interest on escrow accounts, and disregards the OCC’s finding that the NBA preempts such laws. ABA also maintained that state IOE laws can raise costs for banks and consumers, create conflicting state requirements, and encourage states to impose more price controls on core banking products. These laws also threaten the uniform national banking system that the NBA was designed to preserve.

Finally, ABA argued that the NBA preempts state IOE laws. ABA asserted that the Ninth Circuit failed to apply Cantero's required analytical framework when it relied on its pre-Cantero decision in Lusnak instead of conducting the case-specific analysis that Cantero requires. ABA noted that the Supreme Court rejected Lusnak because: it adopted a categorical rule requiring "punitively high" interest rates before preemption could apply; failed to perform the nuanced comparative analysis of Supreme Court precedent required by Cantero; and relied on a Truth in Lending Act provision that Cantero held did not apply to the mortgages at issue. ABA also highlighted that, when courts properly apply Cantero, state IOE laws significantly interfere with national banking powers by restricting national banks’ ability to price mortgage escrow accounts, increasing the cost of mortgage lending, and limiting banks’ discretion to manage credit risk. Supreme Court precedent demonstrates that these pricing mandates interfere with national banks' federally granted powers and are therefore preempted under the NBA.

Bottom Line: ABA argued that the Supreme Court should grant review to resolve the circuit split over Cantero and hold that the NBA preempts state laws requiring national banks to pay interest on mortgage escrow accounts.

Document: Brief