Second Circuit sides with Bank of America in New York mortgage escrow class action

MANHATTAN (CN) — Bank of America and other national lenders are not required to abide by a New York law requiring interest payments on mortgage escrow accounts, the Second Circuit found Tuesday.

A split three-judge panel ruled that the state law, which requires banks to pay at least 2% of the annual interest on those escrow accounts, is preempted by the National Bank Act.

"First, New York's interest-on-escrow requirement affects a national banking power: the power to offer mortgages," U.S. Circuit Judge Michael Park, a Donald Trump appointee, wrote for the majority. "Second, it targets banks and limits their broad power to set the terms of mortgage-escrow accounts."

Park added that the New York law doesn't just affect Bank of America, "it affects BOA's 'exercise of its powers,'" impeding on a national bank's right to "make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate," granted by federal law.

"New York's law interferes with that power by limiting the terms on which banks may offer these accounts — specifically, by requiring them to pay at least two percent interest to customers," Park continued. "In short, banks may offer mortgage-escrow accounts without interest under federal law, but under New York law, they may not."

U.S. Circuit Judge Debra Ann Livingston, a George W. Bush appointee, sided with Park's findings. A spokesperson for Bank of America declined to comment on the favorable decision.

Tuesday's ruling reverses a lower court's order denying Bank of America's motions to dismiss a class action against the bank, brought by New York homeowners in Brooklyn federal court over the lenders' refusal to pay the interest on their mortgage escrow accounts.

Bank of America had argued to dismiss the lawsuit on the ground that preempted state laws cannot apply to national banks, but their motion was denied. The Second Circuit then reversed for a first time.

But in May 2024, the Supreme Court gave the homeowners another shot, unanimously ruling that the Second Circuit failed to look closely enough at applicable state statutes like contract or property laws in its ruling. It ordered the court to revisit the issue, this time by conducting a "nuanced comparative analysis" of the scrutinized law and the court's banking preemption precedents.

"Having done so, we again conclude that GOL § 5-601 is preempted," Park wrote in Tuesday's decision.

U.S. Circuit Judge Myrna Perez, a Joe Biden appointee, disagreed. In a dissent, she said the majority opinion "trudges through a strained analysis of the Supreme Court's precedents to reach an approach that is just as capacious" as the federal appellate court's first ruling.

"Moreover, the majority opinion ignores the nature of the federal banking power at issue and recharacterizes the relevant power as broadly as possible to manufacture a direct conflict with state interest-on-escrow laws," Perez wrote. "Having been warned of the dangers of such an expansive view of preemption once, I must respectfully dissent here."

The court's ruling could have far-reaching consequences. At oral arguments last March, Park asked the plaintiffs' attorney Jonathan Taylor whether the case is a Bank of America question or one for the entire national banking industry.

"Ultimately, it's a question for the entire industry of national banks," Taylor replied.

He said in a statement on Tuesday that he is "disappointed by the Second Circuit's decision reversing the lower court's ruling and allowing Bank of America to avoid paying New York homeowners the modest interest required by state law."

"This decision strips homeowners of protections their state enacted and benefits they are entitled to under state law," Taylor said. "We will continue fighting to ensure they receive what they are owed."

The Second Circuit's ruling is contrary to that of the First Circuit, which found in September 2025 that Rhode Island's comparable law is not preempted by the National Bank Act. That court found just the opposite of Park and Livingston — that banks paying interest on escrow accounts does not significantly interfere with their powers to maintain those accounts.

Twelve other states have similar laws to New York and Rhode Island: California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, Oregon, Utah, Vermont and Wisconsin.