The post-Cantero battle over state mortgage escrow-interest laws continues to deepen, with significant implications for national banks’ mortgage servicing practices, pricing flexibility, and exposure to consumer class actions. The Second Circuit recently reaffirmed its prior holding that New York’s escrow-interest law is preempted, and the OCC issued new rulemaking designed to bolster preemption defenses and affect national uniformity.

On May 5, 2026, the U.S. Court of Appeals for the Second Circuit issued a significant decision in Cantero v. Bank of America, N.A., holding for a second time that federal banking law preempts New York’s statute requiring lenders to pay interest on mortgage escrow accounts. The Second Circuit’s decision creates a circuit split with the Ninth Circuit’s decision in Kivett v. Flagstar Bank, FSB and the First Circuit’s decision in Conti v. Citizens Bank, N.A, which respectively held that that California’s and Rhode Island’s interest-on-escrow law were not preempted. These decisions have significant implications for national banks.

In Cantero, the plaintiffs—borrowers with mortgage escrow accounts—filed punitive class actions alleging that the national bank failed to comply with New York state law, which requires lenders to pay 2% interest on certain escrow account balances. The defendant banks argued that this state law is preempted by federal banking law, which allows national banks to offer escrow accounts without requiring interest payments. Similar arguments were made by the plaintiffs and banks in Kivett and Conti.

Cantero Decision

The Cantero case has had a long, winding history up to the Supreme Court and back. In the beginning, the Cantero district court denied the bank’s motion to dismiss the class action based on the failure to pay 2% interest on escrow accounts, and the case ultimately reached the Second Circuit for a second time after prior appeals and a remand from the U.S. Supreme Court directing a more nuanced preemption analysis under its Barnett Bank precedent. Under Barnett Bank, courts must consider the nature the state law’s interference and the degree of its impact on national banking powers.  A state law is preempted if it “prevents or significantly interferes” with a national bank’s exercise of its powers, which is a situation-specific inquiry.

The Second Circuit in a 2-1 decision held on remand from the Supreme Court that New York’s interest-on-escrow requirement is preempted by federal law and reversed the district court’s decision. The majority reasoned:

  • Interference. The escrow interest law directly affects a national bank’s power to make residential mortgage loans and structure and administer escrow accounts. Because escrow accounts are integral to mortgage lending, regulating their terms interferes with a recognized banking power.
  • Nature of the Interference. Unlike generally applicable state laws (e.g., contract or property rules), New York’s statute specifically targets financial institutions and limits their ability to set terms of escrow accounts. The Second Circuit’s majority opinion concluded that this type of regulation resembles laws the Supreme Court has previously found preempted. Federal statutes such as RESPA regulate escrow accounts extensively but do not require banks to pay interest. The majority viewed that omission as reflecting Congress’s intent to preserve bank discretion over escrow account terms, including whether to pay interest.
  • Degree of Interference. The majority emphasized that requiring a minimum interest rate increases operational costs for lenders, limits pricing flexibility, and may reduce availability of escrow accounts or mortgage lending. The majority analogized this burden to prior cases where state laws significantly impaired banking operations.

The Cantero plaintiffs filed a writ of certiorari to the U.S. Supreme Court last week asking the court to resolve the circuit split.

Practical Implications for National Banks

The Second Circuit’s majority decision limits states’ ability to impose varying escrow-interest requirements on national banks. However, the ruling is contrary to earlier decisions from the Ninth and First Circuit decisions that held California and Rhode Island state laws requiring mortgage lenders to pay interest on escrow accounts were not preempted. The resulting circuit split could make the case ripe for another appeal to the U.S. Supreme Court. Complicating this situation, however, is swift rulemaking by the Office of the Comptroller of the Currency (OCC).

OCC Rulemaking

On May 15, 2026, the OCC issued its final preemption determination, concluding that federal law preempts state laws that restrict OCC-regulated banks’ flexibility to decide whether and to what extent to (1) pay interest or other compensation on funds placed in real estate escrow accounts; or (2) assess fees in connection with such accounts. Codified in 12 C.F.R. § 34.7, the OCC promulgated a rule that federal law preempted the following state laws:

  • California: Cal. Civ. Code sec. 2954.8;
  • Connecticut: Conn. Gen. Stat. sec. 49-2a;
  • Guam: 11 Guam Code Ann. sec. 106103;
  • Maine: Me. Rev. Stat. Ann. tit. 9-B, sec. 429; Me. Rev. Stat. Ann. tit. 33, sec. 504
  • Maryland: Md. Code Ann., Com. Law secs. 12-109, 12-109.2;
  • Massachusetts: Mass. Gen. L. ch. 183, sec. 61;
  • Minnesota: Minn. Stat. Ann. sec. 47.20, subd. 9;
  • New York: N.Y. Gen. Oblig. Law sec. 5-601;
  • Oregon: Or. Rev. Stat. secs. 86.245, 86.250;
  • Rhode Island: 19 R.I. Gen. Laws sec. 19-9-2;
  • United States Virgin Islands: V.I. Code tit. 9, sec. 67;
  • Utah: Utah Code Ann. sec. 7-17-3;
  • Vermont: Vt. Stat. Ann. tit. 8, sec. 10404; and
  • Wisconsin: Wis. Stat. secs. 138.051, 138.052.

The OCC also issued its final Escrow Powers Rule to codify in 12 CFR Part 34 and 12 CFR Part 160 national banks’ authority to establish real estate lending escrow accounts and the flexibility to set the terms and conditions of such accounts.

The OCC’s preemption determination, which will become effective June 18, 2026, and Escrow Powers Rule, which will become effective 30 days after publication in the Federal Register, will complicate the circuit split. Although the rules are likely to bolster preemption arguments for national banks, it remains unclear how much weight courts will afford the OCC’s determinations in future litigation, particularly following the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which overruled Chevron deference for agency decisions. As challenges to the OCC rules and underlying preemption questions continue to develop, courts may reach differing conclusions. Banks outside of the jurisdiction of the First, Second, and Ninth Circuits should conduct a nuanced analysis of their governing circuit’s case law and likely rulings based on these developments.

May 27, 2026