Second Circuit: NY Interest on Escrow Laws Preempted – Circuit Split Takes Shape
The Second Circuit ruled on May 5, 2026 that New York’s two-percent mortgage-escrow interest requirement (N.Y. Gen. Oblig. Law § 5-601) is preempted by federal banking law, holding in Cantero v. Bank of America, N.A. that the law significantly interferes with national banks’ powers under the National Bank Act. As we wrote about here, the First Circuit reached the opposite conclusion last fall in Conti v. Citizens Bank. That conflict now sets up a likely return to the Supreme Court.
What the Court Held
Some brief context: the Second Circuit had previously ruled in 2022 that GOL § 5-601 was preempted, using a “control test”— asking whether the state law exercised control over a federally granted banking power. The Supreme Court unanimously vacated that decision in 2024, rejecting the control test as too broad and instructing the Second Circuit to instead conduct a “nuanced comparative analysis” comparing the state law to the Court’s existing banking preemption precedents. This 2026 decision is the Second Circuit’s answer on remand.
On remand, the majority applied a two-part framework examining the “nature” and “degree” of GOL § 5-601’s interference with federal banking powers:
Nature of interference: The court asked whether GOL § 5-601 targets banks specifically (rather than applying as a general rule) and whether it limits a broad federal grant of power. It found that both were true here:
The law applies only to “mortgage investing institutions”—not a generally applicable consumer protection rule.
Federal law grants national banks broad incidental power to set the terms of mortgage-escrow accounts, and GOL § 5-601 directly constrains that power by mandating a minimum interest rate.
The court found additional support in RESPA’s silence on interest requirements. Congress extensively regulated escrow accounts in RESPA but never mandated interest payments, which the court read as an implicit recognition that banks have broad discretion on that question.
TILA reinforced this: Congress expressly incorporated state interest-on-escrow laws for certain mandatory escrow accounts, but not others. The court read that selective incorporation as evidence that similar state laws – like GOL § 5-601 – are preempted where Congress chose not to incorporate them.
Degree of interference: The court asked how severely the law impairs banks’ abilities to offer mortgage-escrow accounts efficiently. It concluded the burden was substantial:
The two-percent floor far exceeded prevailing market rates. CD rates ranged from only 0.16% to 0.91% between 2010 and 2020, meaning the mandated rate was often more than double what banks were earning on comparable instruments.
That cost burden could cause banks to offer escrow accounts on fewer loans, recoup costs through higher fees or rates elsewhere, or reduce mortgage lending in New York altogether.
The court analogized to a 1954 Supreme Court case, Franklin National Bank of Franklin Square v. New York, where New York’s ban on national banks using the word “savings” in advertising was struck down because it prevented efficient exercise of the deposit-taking power. GOL § 5-601 was found at least as intrusive, and the court noted that a law altering a bank’s pricing almost by definition interferes more with its powers than a simple advertising restriction.
Judge Pérez dissented, arguing the majority effectively revived the categorical “control test” the Supreme Court rejected, and that Bank of America failed to demonstrate any material distortion to bank incentives or consumer behavior from a modest interest requirement.
The Circuit Split
The Second Circuit’s ruling puts it in direct conflict with the First and Ninth Circuits:
First Circuit (Conti v. Citizens Bank, Sept. 2025): Rhode Island’s escrow-interest law is NOT preempted. Banks must comply.
Ninth Circuit (Kivett v. Flagstar Bank, 2025): Reached a result aligned with the Second Circuit, though on different grounds tied to prior circuit precedent rather than a fresh Cantero analysis.
Second Circuit (Cantero, May 2026): New York’s escrow-interest law IS preempted. Banks in the Second Circuit now have a clear basis to assert preemption.
Approximately eleven other states also have somewhat similar escrow-interest laws, including California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, Utah, Vermont, and Wisconsin.
OCC Proposed Rules Add to the Mix
In December 2025, the Office of the Comptroller of the Currency (OCC) issued two proposed rules: one codifying national banks’ authority to set escrow terms (including whether to pay interest) as a business decision, and a formal preemption determination targeting New York’s GOL § 5-601 and eleven similar state laws. The Second Circuit noted the OCC’s position but did not rely on the proposals, as they had not been finalized. If finalized, those rules would provide an additional basis for preemption arguments across all circuits, though the rules remain proposed and may face their own legal challenges.
Takeaways for Mortgage Industry Clients
Geography matters now more than ever. Lenders and servicers operating in multiple circuits face different legal obligations depending on where their loans sit. Second Circuit banks have a strong preemption argument; First Circuit banks do not.
Do not abandon state compliance frameworks. Even where preemption looks strong, litigation risk remains until the Supreme Court resolves the split. Existing escrow-interest compliance programs should not be unwound hastily.
Map your state-law exposure. With a dozen states in the mix and conflicting circuit authority, a state-by-state exposure analysis is essential. The OCC’s proposed preemption determination lists eleven states beyond New York, a useful starting point.
Watch the OCC rulemaking. If the proposed rules are finalized, national banks will have an additional, independent basis for preemption arguments across all circuits.
Expect Supreme Court review. A clean circuit split on a question affecting banks in all fifty states is exactly the kind of issue the Supreme Court likes to address. Prepare litigation strategies accordingly.
Bottom Line
The Second Circuit’s Cantero decision is a win for certain national banks in the short run, but the circuit split uncertainty is far from over. The preemption question is unsettled nationally, and mortgage lenders and servicers need a jurisdiction-specific, compliance and litigation strategy. For more information, contact troy@garrishorn.com.