Second Circuit Again Preempts NY Mortgage Escrow Interest Law
The Second Circuit ruled New York's mortgage escrow interest law is preempted by federal law—for a second time.
Why it matters: The decision deepens a split among federal appeals courts, setting the stage for potential Supreme Court review. The outcome could reshape federal-state banking regulatory boundaries and directly impact mortgage lending practices nationwide.
- On May 5, 2026, the Second Circuit held New York’s 2% escrow interest mandate preempted by the National Bank Act.
- This follows a Supreme Court remand calling for nuanced analysis under Cantero v. Bank of America.
- The ruling conflicts with First and Ninth Circuit decisions upholding similar state escrow interest laws.
- The OCC has proposed a rule clarifying that national banks can set all escrow account terms, including compensation.
The U.S. Court of Appeals for the Second Circuit reaffirmed on May 5, 2026 that New York's statute requiring banks to pay at least 2% interest on mortgage escrow accounts is preempted by the National Bank Act (NBA). The decision comes after the Supreme Court vacated the Second Circuit’s prior ruling and ordered a closer, precedent-driven analysis following the high court's Cantero decision in 2024.
- In its renewed analysis, the Second Circuit found that federal banking law supersedes New York's General Obligations Law 5-601, mirroring its earlier conclusion despite the Supreme Court's directive.
- This result stands in direct contrast to the First Circuit's decision in Conti v. Citizens Bank, and a Ninth Circuit ruling validating California’s escrow interest law.
- The split has prompted calls from industry groups and the Conference of State Bank Supervisors for Supreme Court intervention, arguing the Second Circuit sidesteps the strict standard for preemption set by Cantero and Congress.
In parallel, the OCC has initiated rulemaking to formally grant national banks authority over escrow account terms, including any customer compensation—a move that could influence future litigation and enforcement.
Dissenting voices, including Judge Myrna Pérez and state bank regulators, criticize the majority for "recharacterizing the relevant power as broadly as possible to manufacture a direct conflict with state interest-on-escrow laws." The unresolved circuit conflict points to likely Supreme Court review in the near future.
By the numbers:
- 2% — Interest rate New York requires banks to pay on mortgage escrow accounts
- May 5, 2026 — Date of the Second Circuit’s latest ruling
- 3 — Federal appellate circuits now split on interest-on-escrow law preemption
Yes, but: The Supreme Court recently declined to review the First Circuit’s Conti decision, signaling uncertainty about if or when it will address the split.
What's next: Supreme Court review may be sought to resolve the circuit split and clarify the scope of federal preemption in banking.