1st Circuit Limits National Bank Act Preemption – Will State Escrow Interest Laws Apply to National Banks?
The First Circuit’s decision in Conti v. Citizens Bank, N.A. could create friction in the mortgage servicing and banking sectors. The court ruled, on September 22, 2025, that Rhode Island’s escrow-interest law is not preempted by the National Bank Act (NBA). Does Conti signal further limitations on preemption and greater exposure to state banking laws?
This case was decided subsequent to the U.S. Supreme Court’s unanimous 2024 ruling in Cantero v. Bank of America, which shaped preemption analysis in the context of the New York escrow interest law under the NBA. (On remand, Cantero continues working through the lower court process.)
Here, the Conti Circuit applies the Supreme Court’s Cantero framework and found that national banks may no longer assume preemption of state regulation of this activity.
Key Takeaways for Mortgage and Banking Executives
Preemption Not a Given
The court held that Rhode Island’s law requiring interest on mortgage escrow funds does not “significantly interfere” with national banks’ powers under the NBA. Courts must now take a case-by-case, fact-driven approach, rather than presuming that federal law trumps state consumer protections.
2. State Escrow-Interest Laws May Apply
At least a dozen states—including California, New York, Connecticut, and Illinois—have similar laws requiring interest on escrowed funds. Under Conti, those laws could now reach national banks, not just state-chartered institutions.
3. Patchwork Compliance Risk
The decision underscores that banks must adapt to a fragmented regulatory environment. Courts are rejecting “field preemption” arguments and demanding proof that a specific state law materially impairs federal banking powers. In practice, national banks may need to comply with multiple—and potentially conflicting—state-level requirements.
4. Litigation and Enforcement Risk Rising
Borrowers and state regulators are likely to test these boundaries. Banks that fail to comply with escrow-interest or other consumer-related statutes risk private class actions, state AG investigations, and reputational fallout.
Strategic Considerations for Banks
To manage to this new reality, national banks at least should consider steps like:
Mapping state-level exposure: Identifying states with escrow-interest, servicing, or consumer protection laws that could now apply.
Reviewing operational readiness: Ensuring escrow accounting systems can calculate and remit interest where required.
Revisiting preemption assumptions: Reassessing prior preemption-based risk models in light of Cantero and Conti.
Engaging with regulators: Expecting increased scrutiny from state banking departments, especially in states with active consumer-protection agendas.
Bottom Line
The Conti decision confirms that preemption may be weakening; it’s a question of proof. Courts may demand evidence that state laws actually hinder national banks’ powers before setting them aside. It is time to think hard about state compliance frameworks, modernizing escrow systems, and preparing for more state-driven enforcement.
For strategic guidance on navigating the evolving preemption landscape or evaluating state-law exposure, contact troy@garrishorn.com.