McShannock v. JP Morgan Chase Bank NA, No. 19-15899 (9th Cir. 2020)
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In 2005-2007, the borrowers obtained residential home mortgages on California properties. California law would normally have entitled them to “at least 2 percent simple interest per annum” on any funds held in escrow, California Civil Code Section 2954.8. The lender, a federal savings association organized and regulated under the Home Owners’ Loan Act of 1933 (HOLA), 12 U.S.C. 1461, did not pay interest because HOLA preempts California law. In a suit against the lender’s successor, Chase, a national bank organized and regulated under the National Bank Act, 12 U.S.C. 38, the district court denied the lender’s motion to dismiss; the Ninth Circuit has held that there is no “conflict preemption” between the National Bank Act and the California law.
The Ninth Circuit reversed. HOLA field preemption principles applied to the claims against Chase even though its conduct giving rise to the complaint occurred after it acquired the loans in question. Because California’s interest-on-escrow law imposed a requirement regarding escrow accounts; affected the terms of sale, purchase, investment in, and participation in loans originated by savings associations; and had more than an incidental effect on the lending operations of savings associations, it was preempted by 12 C.F.R. 560.2(b)(6) and (b)(10), and 560.2(c).
Court Description: Home Owners’ Loan Act / Preemption The panel reversed the district court’s order denying JP Morgan Chase Bank N.A.’s motion to dismiss, and held that California’s law requiring the payment of interest on escrow accounts was preempted by the Home Owners’ Loan Act of 1933 (“HOLA”), and its implementing regulations. Plaintiffs obtained residential home mortgages from Washington Mutual Bank, FA, a federal savings association organized and regulated under HOLA. Chase Bank, a national bank organized and regulated under the National Bank Act, assumed all of Washington Mutual’s mortgage servicing rights and obligations. Through HOLA, Congress vested the Office of Thrift Supervision (“OTS”) with broad authority to shape the regulatory environment for federal savings associations. * The Honorable James S. Gwin, United States District Judge for the Northern District of Ohio, sitting by designation. MCSHANNOCK V. JP MORGAN CHASE BANK 3 The panel held that HOLA field preemption principles applied to plaintiffs’ claims against Chase, a national bank, even though its conduct giving rise to the complaint occurred after it acquired the loans in question from Washington Mutual, a federal savings association. Because California’s interest-on-escrow law imposed a requirement regarding escrow accounts; affected the terms of sale, purchase, investment in, and participation in loans originated by savings associations; and had more than an incidental effect on the lending operations of savings associations, the panel held that it was preempted by 12 C.F.R. § § 560.2(b)(6) and (b)(10), and 560.2(c) of the OTS regulation governing this case. District Judge Gwin dissented because the majority opinion reached a conclusion not supported by the statute’s and regulation’s text, and because California was not otherwise preempted from requiring banks to pay nominal interest on escrow account balances.