The United States Court of Appeals for the First Circuit has reinstated a class action lawsuit against Citizens Bank, N.A., concerning the bank’s alleged failure to pay interest on mortgage escrow accounts as mandated by Rhode Island law. This decision follows the Supreme Court’s 2024 ruling in Cantero v. Bank of America, which clarified the standard for federal preemption of state banking regulations.
Rhode Island General Laws section 19-9-2(a) requires banks operating within the state to pay interest on funds held in mortgage escrow accounts. In July 2021, John Conti filed a class action lawsuit against Citizens Bank, alleging that the bank did not comply with this statute. Citizens Bank moved to dismiss the case, arguing that the National Bank Act (NBA) preempts the state law, thereby exempting national banks from such requirements.
The district court agreed with Citizens Bank and dismissed the complaint. However, while the appeal was pending, the Supreme Court decided Cantero v. Bank of America, which emphasized that courts must conduct a practical assessment to determine whether a state law “prevents or significantly interferes” with a national bank’s exercise of its powers. This standard requires a detailed analysis of the nature and degree of interference caused by the state law.
Applying the Cantero standard, the First Circuit found that the district court had not used the correct legal analysis. The appellate court determined that Citizens Bank had not demonstrated that the Rhode Island statute significantly interfered with its federal banking powers. The court noted that similar interest-on-escrow laws exist in other states and that Congress, in some cases, requires banks to comply with such laws. Because Citizens Bank did not meet its burden to prove preemption as a matter of law, the First Circuit vacated the district court’s dismissal and remanded the case for further proceedings.
This decision underscores the importance for national banks to carefully assess state regulations and their potential impact on banking operations. The ruling also highlights the evolving legal landscape regarding the interplay between federal banking laws and state consumer protection statutes.
For further details on the case and its implications, refer to the American Bankers Association’s analysis of the Conti v. Citizens Bank case.