Above photo: AP Photo/Chris Carlson.
A new case could decimate state-level consumer protections against predatory banking practices.
The United States Supreme Court will soon decide a case that could decimate consumer protections against abusive banking practices — potentially allowing banks to disregard state laws meant to prevent the kind of predatory lending that led to the 2008 financial crisis.
Legal experts say that the case, Cantero v. Bank of America, could invalidate a host of state laws that protect people from predatory lending, junk fees, and other financial scams. The case is ostensibly about a New York statute that forces banks to pay interest to consumers on certain mortgage accounts — but big banks are fighting for the court to rule they are exempt from that law and many others in states across America.
The banking lobby has thrown its weight behind the case alongside corporate-backed conservative legal groups and the U.S. Chamber of Commerce, a powerful business trade group, all of whom have filed briefs supporting Bank of America. Supreme Court justices heard arguments for the case in February, and a ruling is expected potentially in a matter of weeks.
A ruling in favor of the big banks could “completely undermine the notion that the states can exercise meaningful regulation over essentially any banks,” said Arthur Wilmarth, a professor emeritus at the George Washington School of Law who helped write an amicus brief on behalf of the Conference of State Bank Supervisors, an association of state bank regulators, opposing the banking lobby’s position.
“To me, that would return us to where we were in 2004,” Wilmarth said, when states were “essentially hamstrung and undermined in their ability to protect consumers and stop all of this bad lending.” Ultimately, that unchecked predatory lending sent the global economy into a tailspin over a decade ago.
If the Supreme Court decides to rule broadly in favor of the banks, as a lower court did on appeal, major national banks could argue that they would not have to comply with state laws that affect a broad range of banking practices. That could render unenforceable the laws that protect consumers from excessive overdraft fees, impose limits on exploitative payday loans, or prohibit banks from engaging in other abusive practices.
“The States’ authority to regulate financial institutions and protect consumers faces a grave threat,” wrote the Conference of State Bank Supervisors in its amicus brief in the case. A decision in favor of the banking lobby, they wrote, “would create a financial marketplace dominated by national banks and severely impair the States’ ability to protect their residents from fraudulent and abusive financial practices.”
States have often been at the forefront of the fight against predatory banking practices, stepping in when federal regulators have failed to do so.
The case will determine whether “the power of states to make rules that protect their residents apply to national banks,” said Smita Ghosh, an attorney at the legal think tank Constitutional Accountability Center, which has filed an amicus brief in the case opposing Bank of America’s position.
When the nine Supreme Court justices heard the case and questioned attorneys for both sides in February, their opinions appeared split, making it difficult to predict the outcome — meaning that a ruling in the banking lobby’s favor is plausible.
“There’s going to be a division,” Wilmarth said. “It worries me a great deal.”
Big Banks Intervene
The Cantero case began in 2018 when Alex Cantero, a homeowner in New York City, filed a class-action lawsuit against Bank of America. Like most people with a mortgage, Cantero made an extra payment each month that was placed in a mortgage escrow account with Bank of America. The bank holds this money and uses it to pay property taxes and insurance, ensuring homeowners don’t miss those other payments.
A decades-old New York state law requires banks in the state to pay two percent interest on the money in mortgage escrow funds. But Bank of America was not paying Cantero — or anyone else — interest on the money sitting in escrow. When Cantero failed to receive interest payments from the bank, he sued.
By some estimates, Bank of America has robbed consumers of tens of millions of dollars over the years by failing to pay this interest in other jurisdictions.
“Although the banking industry keeps trying to say that the states are trying to impose some terrible burden on them, in fact these escrow accounts serve their interest and are beneficial to them,” Wilmarth said. It’s in lenders’ interest that homeowners pay their taxes on time — and therefore, it’s in their interest to require escrow payments, he said.
“Obviously, the lender doesn’t want a tax lien put on the property,” he noted.
Bank of America, however, contends that it should be exempted from New York’s law.
Bank of America — and the banking lobby — argue that the National Bank Act of 1864, the federal legislation underpinning the U.S. banking system, exempts national banks like Bank of America — institutions chartered by the federal government — from New York’s interest law. They say the National Bank Act exempts national banks from all kinds of state banking regulations.
Banks claim the National Bank Act was intended to protect national banks from too much interference by state regulators, and a ruling against Bank of America in Cantero would “subject national banks to a patchwork of 50 State laws,” undermining stability in the industry.
A litany of trade groups representing the banking industry — the American Bankers Association, the Consumer Bankers Association, the Mortgage Bankers Association, and the Mid-Size Bank Coalition of America, among others — have filed amicus briefs supporting this position. So have the Washington Legal Foundation, a legal think tank backed by Big Oil; the Bank Policy Institute, the banking industry’s policy and lobbying arm; and the U.S. Chamber of Commerce.
All wield significant influence in Washington; the American Bankers Association, big banks’ largest trade group, spent $8.3 million lobbying in 2023. Lobbying by big banks last year, Reuters found in February, reached its highest level since 2008.
With support from the banking lobby, Cantero’s case wound through the courts for years and eventually worked its way up to the U.S. Court of Appeals for the Second Circuit. The appellate court overturned a prior opinion and sided with Bank of America — issuing a broad ruling that contended that national banks were largely exempt from state banking laws.
Judges at the Second Circuit argued in the opinion that national banks are exempt from state laws that “exert control over a banking power granted by the federal government.”
“If you took that language seriously, it would seem to say that states can’t do anything. That they have no right to put any regulations on any national bank,” Wilmarth said. “[The opinion] was completely sweeping in its tone.”
The Court of Appeals for the Ninth Circuit disagreed with the Second Circuit’s opinion in a separate case against Bank of America over a nearly identical California law, which created opposing rulings on the issue. Now, the high court is considering how to resolve the disagreement — and whether to adopt the same sort of broad preemptions for banks as the lower court did.
“Foreclosures Were Spiking”
Mortgage escrows and state banking regulation may seem abstract — but ensuring that state officials can take on big banks has been an essential focus for consumer protection advocates for decades.
Adam Rust, the director of financial services at the Consumer Federation of America, can testify to that. In the years preceding the 2008 financial crisis — as banks issued riskier and riskier mortgage loans, eventually plunging into default — Rust watched as states attempted to address predatory lending, and were repeatedly foiled by big banks like JPMorgan and Citigroup.
In 1999, North Carolina became one of the first states to pass a law addressing predatory lending practices by banks, which trapped low-income or vulnerable homebuyers in high-cost mortgages. Other states soon followed. But at the time, banks adopted the same argument that Bank of America is adopting in the Cantero case: Federal law exempted them from complying with this kind of state regulation.
“I remember how frustrating it was to have a well-crafted state predatory lending law in North Carolina and then to experience banks fleeing to accommodative national regulators to evade it,” Rust said.
Banks had a friend in the Office of the Comptroller of the Currency (OCC), a federal agency that oversees the national banking system. Critics have argued that because the OCC is funded almost entirely through fees it levies on national banks, the agency is hardly an independent authority.
“This is an agency that is completely captured by the big national banks,” Wilmarth said. “It has every interest to go easy on [banks], to encourage their ability to get bigger, and thereby collect more fees.”
OCC’s troubling role in the years preceding the global financial crisis is well documented, as it pushed for banks to be exempted from state regulations like the North Carolina law. The agency issued sweeping rules in 2004, declaring national banks exempt from a wide range of state laws. Thanks in part to such deregulation, predatory lending quickly spiraled out of control.
“[The OCC] was saying that applying sensible consumer protections, whose entire purpose was only to prevent foreclosures, obstructed the ability of national banks to exercise their powers granted under federal law,” Rust said. And all the while, he said, “foreclosures were spiking.”
Wilmarth echoed Rust’s sentiments. “What the OCC did basically was to preempt all the state laws that they could between the 1990s and 2000s, particularly in their 2004 rule,” he said.
“Many people, me included, think these sweeping preemption rules essentially disabled the states from both establishing and enforcing meaningful consumer protections.”
What followed was the total devastation of the financial crisis, in which millions lost their homes, and one in five workers lost their jobs, plunging into poverty.
In 2010, shocked by the devastation wreaked by the subprime lending crisis, lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, a landmark set of reforms to help hold big banks to account. In Dodd-Frank, lawmakers specifically considered whether or not banks should be exempt from state regulations. They decided to narrow the standard, writing in the law that national banks should only be spared from laws that “prevent or significantly interfere with a national bank’s exercise of its powers.”
Yet the OCC appeared reluctant to adhere to the new requirements, issuing revised regulations in 2011 that still preserved broad guidance on preemption. Consumer protection advocates have argued that the OCC’s 2011 rules fell far short of the standard lawmakers had mandated in Dodd-Frank.
While the OCC itself has not formally weighed in on the Cantero case, a coalition of former OCC leaders and senior officials filed an amicus brief in the case in January in favor of Bank of America — a split from Biden’s Justice Department and other federal agencies that raised eyebrows. The OCC officials sided staunchly with the banking lobby and chided the Justice Department for its position.
“State law cannot control or hinder national banks’ activity in real estate lending generally,” OCC officials wrote in the brief.
However, consumer advocates believe that state regulation plays a critical role in banking — because state officials have sometimes taken a more hands-on approach to regulation than the OCC. Furthermore, as consumer advocates noted in their brief on Cantero, states are “often able to respond to problems that arise sooner than the federal government.”
A ruling from the high court is expected in the coming weeks as the justices continue to deliberate on the case — and decide whether to side with the banking lobby or consumer interests.