Today’s Podcast Episode: Cantero II: Circuit Split And OCC Preemption Determination Set Up Likely Supreme Court Review

First and Ninth Circuit decisions conflict with the Second Circuit, while the OCC has concluded that state escrow-interest laws are preempted

National bank preemption is headed toward another Supreme Court showdown. The Second Circuit has held that New York’s mortgage escrow-interest requirement is preempted, directly conflicting with the First Circuit’s decision upholding a comparable Rhode Island requirement and the Ninth Circuit’s decision allowing a similar California law to remain in effect. The OCC has sided with the Second Circuit, issuing final preemption regulations concluding that state laws requiring national banks to pay interest on mortgage escrow accounts are preempted.

[Since our podcast was recorded, ten “blue” state attorneys general have challenged the OCC’s preemption regulations in Oregon federal district court. Their lawsuit adds another important dimension to the dispute and could affect whether the OCC’s regulations remain in effect while the broader circuit split works its way toward possible Supreme Court review. It is probably more likely that the case gets stayed until the Supreme Court resolves the other cases]

In the latest episode of the Consumer Finance Monitor podcast released today, Alan Kaplinsky (founder and former chair for 25 years, and now Senior Counsel of our Consumer Financial Services Group) is joined by Professor Emeritus Arthur Wilmarth of George Washington University Law School to discuss the Second Circuit’s post-remand decision in Cantero v. Bank of America, the Supreme Court’s 2024 decision in the case, the conflicting decisions in Conti v. Citizens Bank in the First Circuit and Kivett v. Flagstar Bank in the Ninth Circuit and the OCC’s newly finalized regulations on federal preemption.

The immediate dispute is whether national banks must pay interest on residential mortgage escrow accounts under state law. The broader question is whether state consumer financial laws (other than state usury laws) may regulate national banks and, if so, when those laws are preempted by the National Bank Act. With certiorari petitions pending in Cantero and Kivett, further proceedings in Conti potentially bringing that case back before the Supreme Court, and the OCC’s regulations now under challenge by ten state attorneys general, the circuit split and the OCC’s intervention make another Supreme Court review increasingly likely.

What did the Supreme Court decide?

The Supreme Court’s 2024 decision did not determine whether New York’s law was preempted. Instead, it rejected both parties’ proposed tests and directed the Second Circuit to apply the “prevents or significantly interferes” standard articulated in Barnett Bank v. Nelson and codified in Section 25(b) of Dodd-Frank.

The Court called for a “practical” and “nuanced” analysis that considers the nature and degree of the interference and compares the challenged state law with prior Supreme Court decisions dealing with National Bank Act preemption of state laws.

On remand, the Second Circuit concluded that New York’s requirement that banks pay two percent interest on mortgage escrow balances significantly interferes with national banks’ federally authorized powers. The court emphasized, among other things, the loss of banks’ discretion over whether to pay interest and the operational difficulties created by differing state requirements.

Judge Myrna Pérez dissented, arguing that the majority had effectively returned to the categorical approach rejected by the Supreme Court. Professor Wilmarth agrees with that criticism, contending that treating reduced efficiency or flexibility as sufficient to establish preemption could make the “significantly interferes” standard far broader than the Supreme Court intended.

A genuine circuit split

The First Circuit reached the opposite conclusion in Conti, holding that Rhode Island’s mortgage escrow-interest requirement was not preempted. The Ninth Circuit reached a similar result in Kivett, although its decision relied heavily on its earlier Lusnak precedent.

The important point is that the courts generally agree on the governing standard but disagree about how it should be applied. The Second Circuit views the state requirement as a significant interference with federally authorized bank powers, while the First and Ninth Circuits view the resulting costs, burdens and limitations on bank discretion as insufficient to establish preemption.

That disagreement creates a substantial incentive for the Supreme Court to revisit the issue.

The OCC takes the Second Circuit’s side

The OCC has now entered the controversy directly. In May 2026, it issued a final rule confirming the authority of national banks and federal savings associations to establish and maintain mortgage escrow accounts and determining that the terms of those accounts—including whether and how much interest is paid—are matters within the institutions’ federally authorized discretion.

At the same time, the OCC issued a final preemption determination covering New York and 13 other state laws. The OCC concluded that the laws are preempted because they significantly interfere with national banks’ federally authorized powers.

Professor Wilmarth questions whether the OCC adequately demonstrated the required “significant interference,” particularly because the state laws impose different interest requirements. He also questions whether the OCC’s approach effectively amounts to field preemption, which Dodd-Frank was intended to restrict.

The states now challenge the OCC

The ten-state lawsuit gives those issues immediate practical importance. The states contend that the OCC exceeded its authority and failed to satisfy Dodd-Frank’s requirements for making preemption determinations.

Among other things, the litigation could require a court to examine whether the OCC adequately supported its conclusion that the various state laws significantly interfere with national bank powers. It also could determine whether the OCC’s determinations remain in effect while the litigation proceeds.

The lawsuit therefore provides another potential route for judicial review of the OCC’s position even before the Supreme Court decides whether to hear Cantero Conti and/or Kivett.

Indeed, it is conceivable that the Supreme Court might suspend its review of Cantero II until the litigation in Oregon is resolved.

Why Cantero matters

Although the cases concern mortgage escrow accounts, their implications are much broader. At stake is the balance between federal and state authority over national banks.

If the Second Circuit and OCC approach prevails, a much broader range of state consumer financial laws could be vulnerable to preemption when they limit federally authorized bank discretion or impose meaningful operational burdens. If the First and Ninth Circuit approaches prevail, states would retain considerably greater authority to regulate national banks unless they can demonstrate that a particular law significantly interferes with a federally authorized banking power.

The Supreme Court now has an opportunity to provide the guidance that was missing from its 2024 decision.

Our podcast with Professor Wilmarth explores these issues in depth and provides an important perspective on what could become one of the most significant national bank preemption disputes in years.

Listen to the podcast below or click here to listen on the firm website.