Michael Dawson: On this episode, we will be discussing the court's recent decision in Cantero v. Bank of America, which concerns the scope of state's authority to regulate national banks and the standard for showing that a state law is preempted by the National Banking Act. Joining me to discuss this case is Julie Williams, Senior Counsel in Wilmer Hale's Washington, D.C. office. Julie is a leading authority in bank and financial services regulation, having served as chief counsel and first senior deputy comptroller of the Office of the Comptroller of the Currency, the OCC, one of the nation's primary banking regulators, where Julie served for two decades. Thank you so much, Julie, for joining us on this episode on our Supreme Court mini-series.

Julie Williams: Michael, thank you. This is great. Great to do.

Michael Dawson: Let's start with some factual background. Could you say a little word about who the parties were in the case and what the dispute was about?

Julie Williams: Sure. The parties were a borrower, Mr. Cantero, and the bank lender, B of A, and the issue was around whether Bank of America was required to pay interest on the escrow account that was required to be set up in connection with the mortgage. An escrow account is an account that is typically set up in connection with taking out a mortgage. The borrower pays a certain amount each month into the escrow account, which the bank then uses to pay taxes and insurance. It assures the payment of taxes and insurance. And so, the question was whether the bank was required by a New York law to pay at least 2% interest on that account. Bank of America argued that the New York law couldn't force it to pay interest because Bank of America was a federally chartered bank and New York State couldn't tell a federally chartered bank what to do under the National Banking Act.

Michael Dawson: Tell us a little bit about that. What is it and why does it matter?

Julie Williams: Well, national banking was created shortly after the Civil War. It's a national banking system. It is a system that exists alongside of the system of bank regulation that the states have, and national banks derive their powers and primarily are regulated by federal agencies in contrast with state-chartered banks, which derive their powers from state law and are primarily regulated at the state level. And so, you have two sort of parallel banking systems, and that's what's referred to as the dual banking system that the U.S. has. Under constitutional principles of supremacy, where you have a conflict between a federal authority and a state restriction, the federal authority wins. And that's the supremacy clause. And here, the federal law were the powers granted to national banks under the National Bank Act.

Michael Dawson: So how does someone know whether a state law is preempted under the National Banking Act? What's the standard for preemption? Is it absolute conflict? The two have to be at odds? Or is it something else?

Julie Williams: Well, that is actually a great question and was at the heart of the Cantero case. Many state laws where there have been questions about preemption, over the recent years, at least, have been state consumer protection laws. And, the issue around preemption of state consumer protection laws was, “do they interfere to some meaningful extent with the powers of national banks to do certain things that the banks are authorized to do?” The area was very contentious, and ultimately Congress waded in with the Dodd -Frank Act in 2010 and promulgated some standards for determining when a state consumer financial law is preempted. And I drop a footnote here. This is state consumer financial law. It's not other types of state law that were addressed in Dodd-Frank. And just to make things a little bit more complicated, Dodd-Frank actually had three standards for preemption of state consumer financial laws. One was if the state law discriminated against national banks compared to state banks, treatment of state banks. Another was if the state law significantly interfered as the Supreme Court had discussed in a very important case called Barnett, if there was a significant interference with a national bank power. And then thirdly was if the state law was preempted under some other federal law, and there's a complicated issues of citation that that relates to. But there are actually three standards of preemption that Congress adopted in Dodd-Frank to run alongside with whatever standards of preemption are applicable when you're not talking about a state consumer financial law.

Michael Dawson: And so in this case, in Cantero, it sounds like it's a consumer protection case. We've got a consumer, wants a mortgage, has to pay money into an escrow account, and New York State says, “Hey, banks, you've got to pay interest on that escrow account.” And the argument of the bank is that that state consumer protection law impinges on a power granted under the National Banking Act and therefore should be preempted. how did the court at the district level, at the Second Circuit Court of Appeals level, think about that question? And what did they get right? What did they get wrong? What did the Supreme Court do about it?

Julie Williams: Well, I'll tell you the punchline here is that according to the Supreme Court, both of the Courts of Appeals that had looked at this got it wrong. So in the Cantero case, which was in the Second Circuit, the Second Circuit basically applied a preemption standard that a state law couldn't control any aspect of how a national bank exercised its powers. So, a very generous preemption standard. There was another case that had arisen out in California that had dealt with the requirement to pay interest on mortgage escrow accounts, which required the payment of at least 2% of interest on mortgage escrow, very same type of law as in Cantero, and in the Ninth Circuit, the Circuit Court concluded that that California state law was not preempted because it wasn't punitive or severe enough to really interfere with the bank's ability to do business.

Michael Dawson: So one Court of Appeals is applying a control test and the other one is applying an interference test.

Julie Williams: A control test and a type of interference test, yes.

Michael Dawson: And they both got it wrong?

Julie Williams: According to the Supreme Court, they both got it wrong. The Cantero decision was about the Second Circuit decision, where the Second Circuit took a position that this is the control test, which the Supreme Court in Cantero said basically under that test, everything, just about everything, would be preempted and that's not the Barnett test that's referred to in the Dodd-Frank law. And then about 10 days later, the Supreme Court remanded back to the Ninth Circuit, another case. This is the one that the court had found the same type of state law, not preempted, and said that one was wrong too, and they both needed to be reconsidered in accordance with the standards in the Supreme Court's Cantero decision which looked to the standards in a previous Supreme Court decision, which is Barnett.

Michael Dawson: So, and both of these were unanimous decisions by the Supreme Court, remanding.

Julie Williams: Remanding, yeah.

Michael Dawson: How could these circuit courts each get the case wrong in a way that was so clear to a unanimous Supreme Court? How could they get it so wrong?

Julie Williams: Well, they picked the wrong elements of the Supreme Court's earlier Barnett case to focus on. I think perhaps in the Ninth Circuit, there may have been some, I want to say political or public policy consideration driving the result. I wouldn't say that for the Second Circuit. The Second Circuit just took a very generous approach to the circumstances where you could find preemption. And the Supreme Court said, do over. Both of them.

Michael Dawson: And so where are we now? What is the standard? Is it a bright line or is it something more nuanced?

Julie Williams: It’s not a bright line. The banking industry would have liked the Second Circuit's control test because very few state laws would have survived under that test. Where we are, ironically, is back to the case law that preceded Dodd-Frank, which gave rise to all of this kerfluffle and the jurisprudence that has developed over literally 150 years in construing national bank preemption, and looking at some of the key cases that preceded the Cantero decision, that the Supreme Court specifically pointed to. It was like, “look at this case, look at that case, look at what we did there, look at the level of interference that we found sufficient or insufficient to find preemption.” So, it's back to the future. It rolls back the clock on standards to be applied going forward. But these are not new standards. They're the standards that have been litigated for decades.

Michael Dawson: Interesting. Now, some critics of the opinion argue that they want bright lines and they argue that the court has provided too little guidance on how to apply the preemption standard. Do you agree with that criticism?

Julie Williams: I think that the Court did not provide the bright line that some wanted, but the court was very clear on the standards to look to and it's a nuanced analysis that's required, but it's not a new or unproven type of analysis to apply. There's plenty of history and precedent behind it.

Michael Dawson: Now you were in the OCC when Congress considered and passed the Dodd-Frank legislation. At the time, what did the OCC think was the right standard and what did you advocate for?

Julie Williams: I have to chuckle here, Michael, because the decision of the Supreme Court in Cantero in how to read the Dodd-Frank language was exactly the way we thought it should be read and what we advocated.

Michael Dawson: Why does this preemption doctrine matter to the economy, to consumers? Why is it important?

Julie Williams: The doctrine of preemption in finance today is way more than just sort of an interesting historical relic. As you think about how financial products and services are delivered, how the banking business is conducted, it is one that is – it does not operate according to state lines. With the technology, the way of communicating back and forth with customers, the way of delivering products, the extent to which so many banking products and services are really information-based. The ability to do business in multiple jurisdictions under a single recognized source of powers and consistent oversight of those powers, for the most part by one federal bank regulatory agency, preemption becomes even more important as the business of banking evolves with the use of technology.

Michael Dawson: Now, when you were at the OCC, the OCC, unlike some other federal agencies, had independent litigation authority. Could you talk a little bit about that and what it was like to exercise that, maybe specifically on preemption type questions? And if you can talk a little bit about your journey on preemption up through the courts, up to and including the Supreme Court.

Julie Williams: Well, the OCC does have independent litigating authority and has filed amicus briefs on a number of topics within many decades. One of the topics that the OCC has filed a number of amicus briefs on is preemption, are preemption cases. And the agency has thought over the years that preemption is a really fundamental characteristic and benefit of the National Bank Charter and felt a responsibility to defend it. And so, at the OCC, the district court level, and the Court of Appeals level, filed many, many amicus briefs. The OCC does not have independent litigating authority before the Supreme Court. And when the cases would go to the Supreme Court, the Solicitor General's office would represent. And I would note, up until this Cantero case, that was always a very harmonious relationship. And at the OCC, we got tremendous support from the SG's office in Supreme Court arguments. Cantero was different.

Michael Dawson: How so?

Julie Williams: The SG's office decided that they had a better view about how to apply the Dodd -Frank provisions and put in an amicus brief that was not in accord with the positions that the OCC had been taking for the last number of decades.

Michael Dawson: Interesting. So, the Solicitor General's office essentially changed the way it was arguing these cases in Cantero.

Julie Williams: That's correct.  

Michael Dawson: And why did they do that?

Julie Williams: I think it was probably something that was driven by policy considerations.

Michael Dawson: Meaning...

Julie Williams: A preference to have more state consumer protection laws rather than fewer state consumer protection laws apply to national banks.

Michael Dawson: What else is important for us to know about this decision?

Julie Williams: Well, I think what's important is the “what's next?”, because the case goes back to the Second Circuit. The case goes back to the Ninth Circuit. And to your point about implications for administrative dimensions, at the very, very end of the Cantero decision, there's a footnote that says that the parties may wish to raise the relevance, if any, of the OCC's preemption regulations. Which was not something raised in the case in its first time through.

Michael Dawson: What's an example of a preemption regulation?

Julie Williams: Well, an example of a preemption regulation is state laws dealing with escrow requirements are preempted. Absolutely on point.

Michael Dawson: Well, thank you very much, Julie. It's been a pleasure and very interesting discussion. Thank you for appearing on In the Public Interest.

Julie Williams: Thank you, Michael. This was fun.