On February 28th, legal analysts and bankers listened in anticipation as the Supreme Court of the United States heard oral arguments in Cantero v. Bank of America.
On its face, the case deals with a niche issue regarding interest rates and escrow accounts. Still, with the arguments being made by Bank of America, the Supreme Court’s decision could be wide ranging, possibly fundamentally altering the ability of states to regulate America’s biggest banks on behalf of consumers.
To understand the importance of the case, it is necessary to explain how America’s banking system operates within its federal character.
In the United States, banks can receive a charter to operate through two means. The first, and much older method, is through the states. With the exceptions of the First and Second Banks of the United States, the operations of banks were originally conceptualized as a state affair where the federal government was minimally involved. Nonetheless, during the Civil War this predominantly state led system was upturned.
To pay for the war effort, Congress, under the direction of President Lincoln, created greenbacks, which was a new form of legal tender whose value was guaranteed by the federal government. The new currency meant that the northern government could print the money it needed to build up the necessary wartime infrastructure to defeat the Confederate insurrection being waged by the southern states.
The problem was that while Congress created the new tender, it had no means of circulating it into the economy. To rectify this, Congress passed the National Bank Act (NBA) of 1863, which allowed for the creation of federally charted banks that could operate in multiple states. The following year, Congress would pass a second National Bank Act, which brought national banks under the direct regulatory oversight of the federal government. Thus, a dual system of banking was established.
Banks could be charted by a state or by the federal government. Depending on which, banks would face a different regulatory regime. States were still allowed to have some regulations over federally chartered banks, but the regulations must not “significantly interfere” with a national bank’s overall operations.
At the time the NBA was passed, state regulations on banks were considerably less strict than what was required by the federal government.
However, a century-and-a-half later, the regulatory regimes for both states and the federal government have changed dramatically. Some states — Washington included — have attempted to rein in some of the predatory practices of America’s national banks by requiring them to pay a modest interest rate on escrow accounts.
An escrow account is a service provided by banks as a third-party holder of funds between two other parties. Because buying a home is such a significant and complicated expense, banks often require that borrowers open an escrow account as a condition of their mortgage. Even though the money deposited into the borrower’s escrow accounts goes toward a bank’s capital, banks have historically avoided paying interest on escrow accounts; meaning, unlike normal saving accounts, escrow accounts are a source of free money for banks. By some estimates, Bank of America has made tens of millions of dollars by shirking these interest payments.
Consumer advocates have pointed to the intrinsic unfairness of banks requiring people to open an account that they then refuse to pay interest on. In the early 1990s, Congress attempted to pass the Escrow Account Reform Act, which would have required all banks to pay interest on escrow accounts. Unfortunately, the law failed. Nonetheless, even before the push to reform escrow accounts on the federal level, some states already required banks to pay interest on escrow accounts, and over the years the number has steadily increased. Currently, fifteen states require banks to pay interest on escrow accounts, and Congress has tacitly recognized the legitimacy of these regulations.
Regardless, the banks do not want to pay.
In 2010, Alex Cantero purchased a home in New York state with a mortgage from Bank of America, a federally chartered bank. New York requires all the banks in its state to pay a modest minimum 2% interest on all escrow accounts. Instead of complying with state law, Bank of America claimed that the NBA, along with the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 — which was passed to protect people from the shenanigans of big banks — exempted them from New York’s regulations.
The modest interest rates that select states require banks to pay on escrow accounts seems like a small issue, but the broader implications of the case are not lost on the banking industry. In its amicus curiae brief, the American Bankers Association (ABA) has argued that nearly any regulations of national banks by the states would be a violation of the preemptive clause of the NBA. According to the ABA, only Congress has the authority to regulate national banks; meanwhile, the amount of money the banking industry has spent on lobbying the same Congress has swelled to over $65 million annually.
Analysts remain uncertain as to how the Supreme Court will rule.
However, advocates of financial reform are not reassured by the rhetoric of the Court’s conservative majority. From the oral arguments, both Justice Brett Kavanaugh and Justice Clarence Thomas seemed certain that the NBA invalidated New York’s regulations. Furthermore, the amicus curiae brief supporting Bank of America’s position filed by former high-level officials from the Office of the Comptroller of the Currency during the administrations of Clinton, Bush Jr., Obama, and Trump indicate that many in Washington’s political establishment — regardless of party — believe in backing the banks on this issue.
If the Supreme Court does end up siding with Bank of America, it will be yet another example of how the “too big to fail” megabanks are regaining some of the political power they lost in the aftermath of the Great Recession. Depriving states of the means to modestly regulate national banks would further tilt America’s already unfair banking system in favor of the megabanks. However, as we learned from the Great Recession, megabanks’ control over our economy is not to be trusted.