Decision puts lenders on notice: state escrow interest laws can’t be ignored. Are your compliance practices up to date?
A federal appeals court just revived a lawsuit over state-mandated escrow interest, signaling national banks can’t always sidestep state requirements.
On September 22, 2025, the United States Court of Appeals for the First Circuit issued its decision in John Conti v. Citizens Bank, N.A., a case closely watched by mortgage professionals. The central question: Does federal banking law override a Rhode Island statute requiring banks to pay interest on mortgage-escrow accounts?
John Conti, a Rhode Island homeowner, took out a mortgage with Citizens Bank, N.A., a national banking association. As part of his mortgage agreement, Conti was required to make advance payments for property taxes and homeowner’s insurance into an escrow account managed by Citizens. Rhode Island law – specifically section 19-9-2(a) - requires banks operating in the state to pay or credit interest on such escrow funds. Citizens Bank did not pay interest, and Conti filed a class action lawsuit on behalf of himself and other customers, alleging violation of the state statute.
Citizens Bank moved to dismiss the lawsuit, arguing that the National Bank Act pre-empts the Rhode Island law, meaning the federal law should take precedence. The district court agreed with Citizens Bank and dismissed the complaint.
While Conti’s appeal was pending, the United States Supreme Court decided Cantero v. Bank of America, N.A., clarifying that courts must assess whether a state law “significantly interferes” with a national bank’s powers, rather than assuming federal law always pre-empts state requirements. Courts must now conduct a practical assessment of the impact of the state law.
Applying this new standard, the First Circuit found that the district court had not used the correct legal analysis. The appellate court determined that Citizens Bank had not shown that the Rhode Island statute significantly interfered with its federal banking powers. The court noted that similar interest-on-escrow laws exist in other states and that Congress, in some cases, requires banks to comply with such laws. Because Citizens Bank did not meet its burden to prove pre-emption as a matter of law, the First Circuit vacated the district court’s dismissal and remanded the case for further proceedings.
For mortgage professionals, this decision means national banks cannot automatically rely on federal law to avoid state escrow interest statutes. The outcome underscores the importance of monitoring state requirements and ensuring compliance, especially for lenders and servicers operating in multiple jurisdictions.
The First Circuit’s ruling highlights that escrow account management is a compliance area subject to evolving legal standards. As the case returns to the district court, mortgage businesses should review their practices to ensure they are aligned with both state and federal obligations.
