A federal appeals court just told national banks they can’t dodge California’s rule to pay interest on mortgage escrow accounts. Here’s what it means for you
National banks must pay interest on California mortgage escrow accounts, the Ninth Circuit ruled October 2, 2025 – reshaping compliance for mortgage servicers statewide.
The case began when California homeowners William Kivett, Bernard Bravo, and Lisa Bravo sued Flagstar Bank, FSB. They alleged that Flagstar failed to pay interest on their mortgage escrow accounts, as required by California Civil Code § 2954.8(a), which mandates at least 2% simple interest per year on certain escrow funds.
Flagstar, a federally chartered bank, argued that the National Bank Act (NBA) preempted California’s law. The bank’s position was that federal law should override the state’s interest requirement, so it was not obligated to pay the interest.
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.
The case drew attention from industry groups, including the Mortgage Bankers Association and the American Bankers Association, who participated as amici curiae. Their involvement reflects the broader industry interest in the outcome and its potential impact on mortgage servicing practices.
Although the decision is not yet final – since the case was remanded for modification of certain details – the Ninth Circuit’s ruling stands as a clear statement that, within its jurisdiction, national banks are not exempt from California’s escrow interest law.
For those in the mortgage industry, the takeaway is clear: review your compliance with state escrow interest requirements. The court’s decision highlights the importance of adhering to state law, regardless of federal charter status, and the financial consequences of noncompliance.
