Banking groups clash over state vs. federal escrow rules

A coalition of national groups representing the financial industry and two organizations representing bank regulators have filed two opposing friend-of-the-court briefs in one of the ongoing high-profile lawsuits over jurisdictional conflicts in escrow rules.

The industry coalition, which includes the American Bankers Association and the Mortgage Bankers Association, has filed a brief backing national preemption of state rules in the lawsuit in Kivett v. Flagstar. The move follows an opposing brief the American Association of Residential Mortgage Regulators and Conference of State Bank Supervisors filed.

The financial industry is following lawsuits like Kivett and Cantero v. Bank of America in part because servicing's value will be impacted if national bank charters can preempt state rules related to escrow interest. It's a question that has gone to the Supreme Court, only to be remanded in line with an argument made by the Biden Administration in a filing to the court by its solicitor general.

Coalition members like the ABA and MBA, who are now weighing in on the case amid a shift in political leadership in Washington, are renewing arguments that a less-than-uniform approach could be destabilizing to national banks, while the regulatory groups are reiterating concerns about preemption creating an uneven playing field. 

"Borrowers could continuously contest whether a bank's practices align with state-specific mandates, resulting in extensive litigation that would drain resources and jeopardize the efficiency and stability of the mortgage market," the ABA, MBA, BPI, Consumer Bankers Association and U.S. Chamber Litigation Center said in their brief.

The two regulatory groups asserted in their January brief that allowing preemption is a concern because it puts smaller financial institutions at a disadvantage.

Preemption "would give national banks an unwarranted competitive advantage over state-chartered and state-licensed mortgage lenders and servicers," CSBS and AARMR said.

Specifically at issue in the Kivett case is the question of whether the bank's national charter preempts a California rule dating back to 1976 that requires banks to pay a minimum 2% in annual interest to borrowers on the balances in their escrow accounts. A dozen or so states have similar rules.

President Trump and his administration could lean either way on the issue or leave the matter to the courts. In some contexts Trump has been an advocate of state rights but in others he's favored consolidation of power at the national level.

Supreme Court Justice Brett Kavanaugh, a first-term Trump appointee, stated in writing for the majority in the similar Cantero case's remand that the Dodd-Frank Act indicates the determinant for preemption is whether it "prevents or significantly interferes" with national bank powers, but he also indicated there's "no bright line" for this.

A similar coalition of financial groups and regulatory entities also had taken opposing stances in that case.

The Supreme Court called for a "competitively nuanced analysis" of possible outcomes in its remand of that case, which centers on questions about whether there is preemption of New York's interest on escrow requirements.

There are multiple cases along the same lines and the court decisions in them have varied in terms of findings for or against preemption.

Oral arguments are set to resume in Kivett later this month, according to the ABA.

While the case may set a new precedent, Flagstar itself is no longer involved in servicing. The bank was ranked No. 8 among depositories in terms of the value of servicing it held at one point last year, according to this publication's MortgageStats, but it staged an exit from servicing through a sale to Mr. Cooper that closed in November. Mr. Cooper is a nonbank institution and found the cost-effective scale it could gain from the transaction attractive.