The U.S. District Court for the Northern District of California ruled in favor of the homeowners. The court ordered Flagstar to pay restitution to the class of borrowers for the unpaid interest. Flagstar appealed, maintaining that the NBA preempted the California statute.
The Ninth Circuit had previously addressed the same legal question in Lusnak v. Bank of America, holding that the NBA does not preempt California’s law requiring interest on escrow accounts. However, after the Supreme Court decided Cantero v. Bank of America – a case involving New York’s escrow interest law and federal preemption – the Supreme Court vacated the Ninth Circuit’s earlier judgment in the Flagstar case and remanded it for further consideration in light of Cantero.
Upon review, the Ninth Circuit concluded that Cantero did not clearly overrule its precedent in Lusnak. The panel explained that, as a three-judge panel, it could not overturn Lusnak unless it was “clearly irreconcilable” with Supreme Court precedent. The court reaffirmed that the NBA does not preempt California’s escrow interest law and upheld the district court’s preemption ruling.
The Ninth Circuit did vacate and remand the district court’s judgment and class certification order, instructing the lower court to modify the class definition date and the judgment amount. The restitution amount was adjusted from $9,262,769.24 to $9,180,580.15, and the class definition date was changed from April 18, 2018, to August 22, 2018.
For mortgage professionals, this decision means that national banks servicing loans in California must comply with the state’s requirement to pay interest on escrow accounts. The ruling confirms that state consumer financial laws, like California’s escrow interest statute, can apply to national banks even when federal law is involved.
