Federal Ruling Puts Mortgage Escrow Exemption in Doubt

May 17, 2018 at 9:59 am 1 comment

Are federally chartered credit unions in New York exempt from a state law mandating that banks and credit unions pay interest on mortgage escrow accounts? The answer used to be a resounding yes, but now it is not that clear anymore.

California, like New York, has a statute mandating that financial institutions pay a minimum amount of interest on mortgage escrow accounts, and it has long been settled law that these provisions don’t apply to federally chartered institutions because they are preempted by federal law. Earlier this year, the Court of Appeals for the Ninth Circuit held that Dodd-Frank changed the law so that now even federally chartered banks have to pay interest. Yesterday, it refused to reconsider its ruling, meaning federal banks in California must pay the escrow.

This decision is not binding in New York and my guess is it will be appealed to the Supreme Court, but there is now persuasive authority to argue that federal institutions in New York, including by implication federal credit unions, have to pay the escrow interest. I anticipate to start seeing similar lawsuits in our neck of the woods if they haven’t started already.

The issue is the extent to which Dodd-Frank watered-down the preemption of state laws for national banks under the National Bank Act. The National Bank Act does not apply to credit unions, but NCUA has traditionally examined the preemption of state laws for national banks when delineating its own preemption authority. The issue in this case involves the following language in Dodd-Frank, which amends the TILA:

(3) Applicability of payment of interest

If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any impound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.



Entry filed under: Compliance, General, Legal Watch, Mortgage Lending, New York State. Tags: .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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