Yesterday, the Supreme Court announced that it would not review the Ninth Circuit’s decision in Lusnak v. Bank of America, N.A., 883 F.3d 1185 (9th Cir. 2018), and would thus leave intact a ruling that compels national banks to comply with state laws requiring the payment of interest on escrow accounts.
In Lusnak, the Ninth Circuit held that a California statute requiring mortgage lenders to pay interest on borrowers’ escrow accounts is not preempted by the National Bank Act. In so holding, the Ninth Circuit disregarded decades of precedent, misread an inapplicable provision of the Dodd-Frank Act, and refused to defer to an on-point regulation issued by the Office of the Comptroller of the Currency (OCC).
Although the Supreme Court grants review in only 4 percent of the paid civil cases (and in only 1 percent of all cases) that it considers, many observers had thought that the odds of review being granted in Lusnak were higher. Not only is the Ninth Circuit’s decision palpably wrong and contrary to long-standing precedent governing a critical area of the economy, but the case had offered the Supreme Court an opportunity to opine on the degree to which courts ought to defer to agency regulations. The Court’s newest members, Justices Gorsuch and Kavanaugh, are known to be hostile to Chevron deference, the jurisprudential doctrine whereunder courts defer to the statutory interpretation adopted by an agency after notice-and-comment rulemaking whenever the statute administered by the agency is ambiguous. Review in Lusnak would have allowed the opponents of Chevron deference to reject the doctrine while employing textualism to reverse the Ninth Circuit and reach a business-friendly result.
As a result of yesterday’s order denying review, Lusnak will continue to bind federal courts within the Ninth Circuit, i.e., those located in California, Oregon, Washington, Arizona, Nevada, Idaho, Montana, Hawaii and Alaska. Thus, the immediate result is that national banks operating within those states will have to abide by state-law interest-on-escrow requirements to the extent statutorily applicable (or risk enforcement actions and private suits).
That said, the denial of review in Lusnak leaves several important questions unresolved. Most obviously, there is the question whether national banks operating outside the Ninth Circuit must adhere to state-law interest-on-escrow requirements. While Lusnak is binding only within the Ninth Circuit, mortgagors, emboldened by yesterday’s ruling, will likely try to persuade other courts to apply state-law interest-on-escrow requirements to national banks. National banks with mortgage portfolios will need to weigh the cost of complying with such requirements against the cost of litigation.
More broadly, the denial of review in Lusnak leaves a cloud of uncertainty hovering over OCC regulations. Until Lusnak, national banks could rely on OCC regulations to guide their conduct, particularly when acting in areas in which the National Bank Act is silent or ambiguous. If national banks can no longer depend on the statutory interpretations embodied in OCC regulations when structuring their operations, they will face an increased risk of enforcement actions by state regulators and class-action suits by private litigants.
Although the Court denied review in Lusnak, it has granted review in at least two other cases in which the question of Chevron deference could be addressed. Last week, at the same conference in which it decided to deny review in Lusnak, the Court granted review in PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., No. 17-1705, which involves the validity of a regulation regarding unsolicited faxes issued by the Federal Communications Commission under the Telephone Consumer Protection Act. And, on November 6, the Court heard argument in BNSF Railway Co. v. Loos, No. 17-1042, which implicates the validity of an Internal Revenue Service regulation regarding the taxation of lost-wage awards in tort suits. National banks—and others active in heavily regulated industries—should watch those cases carefully, for they may determine the extent to which regulated entities can rely on agency regulations.