Donald Lusnak v. Bank of America

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

DONALD M. LUSNAK, on behalf of No. 14-56755
himself and all others similarly
situated, D.C. No.
Plaintiff-Appellant, 2:14-cv-01855-
GHK-AJW
v.

BANK OF AMERICA, N.A., OPINION
Defendant-Appellee.

Appeal from the United States District Court
for the Central District of California
George H. King, District Judge, Presiding

Argued and Submitted November 7, 2016
Pasadena, California

Filed March 2, 2018

Before: Marsha S. Berzon, Morgan Christen,
and Jacqueline H. Nguyen, Circuit Judges.

Opinion by Judge Nguyen
2 LUSNAK V. BANK OF AMERICA

SUMMARY *

Preemption / National Bank Act

The panel reversed the district court’s dismissal of a
putative class action; held that that the National Banking Act
did not preempt California’s state escrow interest law, Cal.
Civil Code § 2954.8(a); and remanded so that the plaintiff
could proceed with his California Unfair Competition Law
(“UCL”) and breach of contract claims against Bank of
America.

Plaintiff filed his lawsuit on behalf of himself and a
proposed class of similarly situated Bank of America
customers, alleging that the Bank violated both California
state law and federal law by failing to pay interest on his
escrow account funds.

In 2010, Congress enacted the Dodd-Frank Wall Street
Reform and Consumer Protection Act. Titles X and XIV of
Dodd-Frank aim to prevent, and mitigate the effects of,
another mortgage crisis.

The panel held that although Dodd-Frank significantly
altered the regulatory framework governing financial
institutions, with respect to National Bank Act preemption,
it merely codified the existing standard established in
Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25
(1996). Applying that standard, the panel held that the
National Bank Act did not preempt Cal. Civil Code

*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
 LUSNAK V. BANK OF AMERICA 3

§ 2954.8(a) because it did not prevent or significantly
interfere with Bank of America’s exercise of its powers.

Turning to plaintiff’s claims for relief, the panel held that
plaintiff may proceed with his California UCL and breach of
contract claims against Bank of America. The panel held
that plaintiff could not rely on 15 U.S.C. § 1639d(g)(3) in
prosecuting his UCL claim where plaintiff’s escrow account
was established prior to the effective date of the section, but
this did not preclude him from obtaining relief under the
theory that the Bank violated the UCL by failing to comply
with Cal. Civil Code § 2954.8(a).

COUNSEL

Roger N. Heller (argued), Jordan Elias, and Michael W.
Sobol, Lieff Cabraser Heimann & Bernstein LLP, San
Francisco; Jae K. Kim and Richard D. McCune, Redlands,
California; for Plaintiff-Appellant.

Mark William Mosier (argued), Andrew Soukup, and Keith
A. Noreika, Covington & Burling LLP, Washington, D.C.;
Peter J. Kennedy and Marc A. Lackner, Reed Smith LLP,
Los Angeles, California; for Defendant-Appellee.
4 LUSNAK V. BANK OF AMERICA

OPINION

NGUYEN, Circuit Judge:

Congress significantly altered the regulation of financial
institutions with the enactment of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd-
Frank”). This sweeping piece of legislation was a response
to the worst financial crisis since the Great Depression, in
which millions of Americans lost their homes. This appeal
requires us to determine whether in light of Dodd-Frank, the
National Bank Act (“NBA”) preempts California’s state
escrow interest law, California Civil Code § 2954.8(a).

California’s escrow interest law, enacted in 1976,
requires financial institutions to pay borrowers at least two
percent annual interest on the funds held in the borrowers’
escrow accounts. This type of account is often set up in
conjunction with a mortgage, either as a condition set by the
lender or at the request of the borrower. Its purpose is to
ensure payment of obligations such as property taxes and
insurance. These accounts often carry a significant positive
balance.

Plaintiff Donald Lusnak, on behalf of a putative class,
filed suit against Bank of America, which does not pay
borrowers any interest on the positive balance in their
accounts. The district court dismissed the suit on the ground
that the NBA preempted California Civil Code § 2954.8(a).

We reverse. Although Dodd-Frank significantly altered
the regulatory framework governing financial institutions,
with respect to NBA preemption, it merely codified the
existing standard established in Barnett Bank of Marion
County, N.A. v. Nelson, 517 U.S. 25 (1996). Applying that
standard here, we hold that the NBA does not preempt
 LUSNAK V. BANK OF AMERICA 5

California Civil Code § 2954.8(a), and Lusnak may proceed
with his California Unfair Competition Law (“UCL”) and
breach of contract claims against Bank of America.

I. Background

A. The National Bank Act

“In 1864, Congress enacted the NBA, establishing the
system of national banking still in place today.” Watters v.
Wachovia Bank, N.A., 550 U.S. 1, 10 (2007) (citations
omitted). The NBA provides for the formation of national
banks and grants them several enumerated powers as well as
“‘all such incidental powers as shall be necessary to carry on
the business of banking.’” Id. at 11 (quoting 12 U.S.C.
§ 24(Seventh)). Congress established the Office of the
Comptroller of the Currency (“OCC”) to charter, regulate,
and supervise these national banks. National Bank Act,
38 Cong. Ch. 106, § 1, 13 Stat. 99, 99–100 (1864) 1; About
the OCC, Office of the Comptroller of the Currency,
https://www.occ.treas.gov/about/what-we-do/mission/index-
about.html (last visited Jan. 25, 2018) (“The OCC charters,
regulates, and supervises all national banks . . . .”).

The NBA also ushered in a “dual banking system,”
wherein banks could be chartered either by the OCC or by a
State authority and be subject to different legal requirements
and oversight from different regulatory bodies. See First
Nat’l Bank of Fairbanks v. Camp, 465 F.2d 586, 592 (D.C.
Cir. 1972); Kenneth E. Scott, The Dual Banking System: A
Model of Competition in Regulation, 30 Stan. L. Rev. 1

1
The Act was renamed “the national-bank act” in 1874. An Act
Fixing the Amount of United States Notes, 43d Cong. Ch. 343, § 1, 18
Stat. 123, 123 (1874).
6 LUSNAK V. BANK OF AMERICA

(1977). Since the NBA’s enactment, the Supreme Court has
often ruled on the scope of State authority to regulate
national banks. See Watters, 550 U.S. at 11–13. Congress
has also enacted legislation “[t]o prevent inconsistent or
intrusive state regulation from impairing the national
system.” See id. at 11.

B. Dodd-Frank

In 2010, Congress enacted Dodd-Frank in response to a
“financial crisis that nearly crippled the U.S. economy.” 2
S. Rep. No. 111-176, at 2 (2010); see also id. at 15 (“It has
become clear that a major cause of the most calamitous
worldwide recession since the Great Depression was the
simple failure of federal regulators to stop abusive lending,
particularly unsustainable home mortgage lending.”
(quoting The Creation of a Consumer Financial Protection
Agency to Be the Cornerstone of America’s New Economic
Foundation: Hearing Before S. Comm. On Banking, Hous.,
and Urban Affairs, 111th Cong. 82 (2009) (Statement of
Travis Plunkett, Legislative Director, Consumer Federation
of America))). Dodd-Frank brought about a “sea change” in
the law, affecting nearly every corner of the nation’s
financial markets. See, e.g., Loan Syndications & Trading
Ass’n v. S.E.C., 818 F.3d 716, 718 (D.C. Cir. 2016); Damian
Paletta & Aaron Lucchetti, Law Remakes U.S. Financial
Landscape, Wall St. J., July 16, 2010, at A1 (“Congress
approved a rewrite of rules touching every corner of finance
. . . .”). One of Congress’s main goals in this sweeping

2
The crisis resulted in 9.3 million lost homes, 8.8 million lost jobs,
and $19.2 trillion in lost household wealth. See U.S. Dep’t of the
Treasury, The Financial Crisis Response in Charts 3 (2012); Laura
Kusisto, Many Who Lost Homes to Foreclosure in Last Decade Won’t
Return, Wall St. J., Apr. 20, 2015, at A2.
 LUSNAK V. BANK OF AMERICA 7

legislation was to prevent another mortgage crisis, which
resulted in “unprecedented levels of defaults and home
foreclosures.” See, e.g., H.R. Rep. No. 111-94, at 48 (2009).

Titles X and XIV of Dodd-Frank, at issue in this case,
aim to prevent, and mitigate the effects of, another mortgage
crisis. In a section of Title X called “Preservation of State
Law,” Congress addressed the framework of NBA
preemption determinations. These provisions were designed
to address “an environment where abusive mortgage lending
could flourish without State controls.” S. Rep. No. 111-176,
at 17. Congress aimed to undo broad preemption
determinations, which it believed planted the seeds “for
long-term trouble in the national banking system.” Id. at 17.
In a section of Title XIV called “Escrow and Impound
Accounts Relating to Certain Consumer Credit
Transactions,” Congress established a series of measures to
help borrowers understand their mortgage obligations.
Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. No. 111-203, § 1461, 124 Stat. 1376, 2178–81
(2010) (codified at 15 U.S.C. § 1639d). These provisions
were designed to correct abusive and deceptive lending
practices that contributed to the mortgage crisis, specifically
with regard to the administration of escrow accounts for
property taxes and insurance. H.R. Rep. No. 111-94, at 53–
56.

C. Factual Background

In July 2008, Lusnak purchased a home in Palmdale,
California with a mortgage from Countrywide Financial.
Soon thereafter, Bank of America purchased Countrywide
Financial and assumed control over Lusnak’s mortgage. In
March 2009, Lusnak refinanced his mortgage, and in
January 2011, he and Bank of America agreed to modify
certain terms. The 2009 agreement and 2011 modification
8 LUSNAK V. BANK OF AMERICA

contain the relevant terms governing Lusnak’s mortgage.
The agreements provide that Lusnak’s mortgage “shall be
governed by federal law and the law of the jurisdiction in
which the Property is located.” The parties agree that the
terms of Lusnak’s mortgage require Bank of America to pay
interest on escrow funds if required by federal law or state
law that is not preempted.

As a condition for obtaining a mortgage, Lusnak was
required to open a mortgage escrow account into which he
pays $250 per month. Lusnak alleges that Bank of America
is able to enrich itself by earning returns on funds in his
account. Bank of America acknowledges that it does not
comply with state escrow interest laws and that Wells
Fargo—its chief competitor and the largest mortgage banker
in America—does. But it contends that no federal or
“applicable” state law requires it to pay interest on Lusnak’s
escrow account funds.

D. Procedural History

On March 12, 2014, Lusnak filed this lawsuit on behalf
of himself and a proposed class of similarly situated Bank of
America customers. Pursuant to the “unlawful” prong of
California’s UCL, Lusnak alleged that Bank of America
violated both state law, Cal. Civ. Code § 2954.8(a), and
federal law, 15 U.S.C. § 1639d(g)(3), by failing to pay
interest on his escrow account funds. Lusnak also brings a
breach of contract claim, alleging that Bank of America’s
failure to pay interest violated his mortgage agreement.
Bank of America promptly moved to dismiss on the ground
that California Civil Code § 2954.8(a) is preempted by the
NBA.

The district court granted the motion to dismiss. Lusnak
v. Bank of Am., N.A., No. CV 14-1855-GHK (AJWx), 2014
 LUSNAK V. BANK OF AMERICA 9

WL 6779131 (C.D. Cal. Oct. 29, 2014). It first
acknowledged that Dodd-Frank clarified and amended the
NBA preemption framework. Id. at *3–5. The district court
then concluded that California’s escrow interest law
“prevents or significantly interferes with” banking powers
and therefore is preempted by the NBA. Id. at *7–8. In so
concluding, the district court determined that section
1639d(g)(3) of Dodd-Frank did not impact the preemption
analysis. Id. at *8–9. This appeal followed.

II. Jurisdiction and Standard of Review

We have jurisdiction under 28 U.S.C. § 1291. This court
reviews de novo a district court’s dismissal for failure to
state a claim under Federal Rule of Civil Procedure 12(b)(6).
Aguayo v. U.S. Bank, 653 F.3d 912, 917 (9th Cir. 2011).
“Questions of statutory interpretation are reviewed de novo
. . . as are questions of preemption.” Lopez v. Wash. Mut.
Bank, 302 F.3d 900, 903 (9th Cir. 2002) (citations omitted).

III. Discussion

The central question here is whether the NBA preempts
California Civil Code § 2954.8(a). Section 2954.8(a)
requires “[e]very financial institution” to pay “at least
2 percent simple interest per annum” on escrow account
funds. 3 The portion of Dodd-Frank to which the parties draw

3
In full, California Civil Code § 2954.8(a) states:

Every financial institution that makes loans upon the
security of real property containing only a one- to four-
family residence and located in this state or purchases
obligations secured by such property and that receives
money in advance for payment of taxes and
assessments on the property, for insurance, or for other
10 LUSNAK V. BANK OF AMERICA

this court’s attention, section 1639d(g)(3), which amends the
Truth in Lending Act (“TILA”), states:

(3) Applicability of payment of interest

If prescribed by applicable State or Federal
law, each creditor shall pay interest to the
consumer on the amount held in any
impound, trust, or escrow account that is
subject to this section in the manner as
prescribed by that applicable State or Federal
law.

15 U.S.C. § 1639d(g)(3). According to Lusnak, this
section’s plain language—requiring creditors to pay interest
on escrow fund accounts like his if “prescribed by
applicable” state law—made clear that Congress perceived
no conflict between state laws like California Civil Code
§ 2954.8(a) and the powers of national banks. Therefore,
Congress clearly did not intend for these state laws to be
preempted by the NBA. Bank of America counters that such
state laws are preempted because they prevent or
significantly interfere with the exercise of its banking
powers, and a preempted law cannot be an “applicable” law
under section 1639d(g)(3). We begin by examining the
relevant preemption framework.

purposes relating to the property, shall pay interest on
the amount so held to the borrower. The interest on
such amounts shall be at the rate of at least 2 percent
simple interest per annum. Such interest shall be
credited to the borrower's account annually or upon
termination of such account, whichever is earlier.
 LUSNAK V. BANK OF AMERICA 11

A. Preemption Framework

1. Guiding Principles of Preemption

Our analysis is governed by “the two cornerstones of . . .
preemption jurisprudence.” Wyeth v. Levine, 555 U.S. 555,
565 (2009). “First, ‘the purpose of Congress is the ultimate
touchstone in every pre-emption case.’” Id. (quoting
Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)). “[W]hen
Congress has made its intent known through explicit
statutory language, the courts’ task is an easy one.” English
v. Gen. Elec. Co., 496 U.S. 72, 79 (1990). Second, we start
with the assumption that the State’s historic police powers
are not preempted “unless that was the clear and manifest
purpose of Congress.” Wyeth, 555 U.S. at 565 (quoting
Medtronic, 518 U.S. at 485).

In the context of the NBA, Dodd-Frank provides that
state laws are preempted if they “prevent[] or significantly
interfere[] with the exercise by the national bank of its
powers.” 12 U.S.C. § 25b(b)(1)(B). Applying this standard,
there is no presumption against preemption. See Bank of Am.
v. City & Cty. of San Francisco, 309 F.3d 551, 558 (9th Cir.
2002). This does not, however, absolve a national bank of
the burden of proving its preemption defense. See Dilts v.
Penske Logistics, LLC, 769 F.3d 637, 649 (9th Cir. 2014)
(“Defendants . . . bear the burden of proof in establishing the
affirmative defense of preemption.”). Where, as here, we are
confronted with state consumer protection laws, “a field
traditionally regulated by the states, compelling evidence of
an intention to preempt is required.” Aguayo, 653 F.3d at
917 (quoting Gen. Motors Corp. v. Abrams, 897 F.2d 34, 41–
42 (2d Cir. 1990)). Accordingly, because this case involves
state regulation of consumer credit, Bank of America must
affirmatively demonstrate that Congress intended to
preclude states from enforcing their escrow interest laws.
12 LUSNAK V. BANK OF AMERICA

2. Dodd-Frank’s Amendments to the NBA Preemption
Framework

Dodd-Frank addressed the preemptive effect of the NBA
in several ways. First, it emphasized that the legal standard
for preemption set forth in Barnett Bank of Marion County,
N.A. v. Nelson, 517 U.S. 25 (1996), applies to questions of
whether state consumer financial laws are preempted by the
NBA. 12 U.S.C. § 25b(b)(1)(B). Second, it required the
OCC to follow specific procedures in making any
preemption determination. See id. §§ 25b(b)(1)(B)
(requiring the OCC to make any preemption determination
on a “case-by-case basis”); 25b(b)(3)(B) (requiring the OCC
to consult the Bureau of Consumer Financial Protection
when making a preemption determination). And third, it
clarified that the OCC’s preemption determinations are
entitled only to Skidmore deference. 12 U.S.C.
§ 25b(b)(5)(A); see Skidmore v. Swift & Co., 323 U.S. 134,
140 (1944) (explaining that an agency’s views are “entitled
to respect” only to the extent that they have the “power to
persuade”). Of these, only the second amendment was an
actual change in the law. The first and third amendments
merely codified existing law as set forth by the Supreme
Court.

Before Dodd-Frank, the Supreme Court held in Barnett
Bank that states are not “deprive[d] . . . of the power to
regulate national banks, where . . . doing so does not prevent
or significantly interfere with the national bank’s exercise of
its powers.” 517 U.S. at 33 (emphasis added). This is
because “normally Congress would not want States to
forbid, or to impair significantly, the exercise of a power that
Congress explicitly granted.” Id.

Following Barnett Bank, the OCC issued in 2004 its
interpretation of the NBA preemption standard: “Except
 LUSNAK V. BANK OF AMERICA 13

where made applicable by Federal law, state laws that
obstruct, impair, or condition a national bank’s ability to
fully exercise its Federally authorized real estate lending
powers do not apply to national banks.” 12 C.F.R. § 34.4(a)
(effective Jan. 13, 2004). The OCC framed its interpretation
as merely reflecting Barnett Bank and earlier obstacle
preemption case law. See Bank Activities and Operations;
Real Estate Lending and Appraisals, 69 Fed. Reg. 1904,
1910 (Jan. 13, 2004) (“The OCC intends this phrase as the
distillation of the various preemption constructs articulated
by the Supreme Court, as recognized in Hines and Barnett,
and not as a replacement construct that is in any way
inconsistent with those standards.”). But its formulation
raised concern and confusion over the scope of NBA
preemption. 4

We never addressed whether the OCC’s interpretation
was inconsistent with Barnett Bank, or whether the
regulation was owed deference while it was in effect. The
Supreme Court, however, has indicated that regulations of

4
The OCC’s preemption rule reads more broadly than Barnett
Bank’s “prevent or significantly interfere” standard in two respects.
First, the OCC omitted the intensifier “significantly” and used the terms
“impair” and “condition” rather than “interfere.” Second, it insisted that
banks be able to “fully” exercise their NBA powers. See Staff of H.
Comm. on Fin. Servs., 108th Cong., Views and Estimates of the
Committee on Financial Services on Matters to be Set Forth in the
Concurrent Resolution on the Budget for Fiscal Year 2005 15–16
(Comm. Print 2004) (“[The OCC’s 2004] rules may represent an
unprecedented expansion of Federal preemption authority . . . .”); Jared
Elosta, Dynamic Federalism and Consumer Financial Protection: How
the Dodd-Frank Act Changes the Preemption Debate, 89 N.C. L. Rev.
1273, 1280 (2011) (“[T]here is reason to believe that the OCC went
beyond clarifying Barnett Bank and in fact made it much easier for the
OCC to preempt state laws than the Barnett Bank standard would
allow.”).
14 LUSNAK V. BANK OF AMERICA

this kind should receive, at most, Skidmore deference—and
even then, only as to a conflict analysis, and not as to the
legal conclusion on preemption. In Wyeth v. Levine, the
Supreme Court noted that when Congress has not authorized
an agency to preempt state law directly, the Court “ha[s] not
deferred to an agency’s conclusion that state law is pre-
empted.” 555 U.S. at 576. Rather, it “ha[s] attended to an
agency’s explanation of how state law affects the regulatory
scheme” based on the agency’s “unique understanding of the
statutes [it] administer[s] and [its] attendant ability to make
informed determinations about how state requirements may
pose an ‘obstacle to the accomplishment and execution of
the full purposes and objectives of Congress.’” Id. at 576–
77 (citations omitted). And the weight to be accorded an
agency’s explanation of a state law’s impact on a federal
scheme “depends on its thoroughness, consistency, and
persuasiveness.” Id. at 577; see Skidmore, 323 U.S. at 140.

We conclude that under Skidmore, the OCC’s regulation
would have been entitled to little, if any, deference in light
of Barnett Bank, even before the enactment of Dodd-Frank.
This regulation was the OCC’s articulation of its legal
analysis; the OCC simply purported to adopt the Supreme
Court’s articulation of the applicable preemption standards
in prior cases, but did so inaccurately. See 69 Fed Reg. at
1910 (“We have adopted in this final rule a statement of
preemption principles that is consistent with the various
formulations noted [in Supreme Court precedent] . . . ; that
is, that state laws do not apply to national banks if they
impermissibly contain a bank’s exercise of a federally
authorized power.”). The OCC did not conduct its own
review of specific potential conflicts on the ground. See id.
It follows that the OCC’s 2004 preemption regulation had no
effect on the preemption standard prior to Dodd-Frank,
which was governed by Barnett Bank.
 LUSNAK V. BANK OF AMERICA 15

In Dodd-Frank, Congress underscored that Barnett Bank
continues to provide the preemption standard; that is, state
consumer financial law is preempted only if it “prevents or
significantly interferes with the exercise by the national bank
of its powers,” 12 U.S.C. § 25b(b)(1)(B). Congress also
made clear that only Skidmore deference applies to
preemption determinations made by the OCC. 5 See id.
§ 25b(b)(5)(A). The OCC has recognized as much. See,
e.g., 76 Fed. Reg. at 43557 (conceding that section
25b(b)(1)(B) “may have been intended to change the OCC’s
approach by shifting the basis of preemption back to the
[Barnett Bank] decision itself”). Therefore, to the extent that
the OCC has largely reaffirmed its previous preemption
conclusions without further analysis under the Barnett Bank
standard, see 76 Fed. Reg. at 43556, we give it no greater
deference than before Dodd-Frank’s enactment, as the
standard applied at that time did not conform to Barnett
Bank. That is, the OCC’s conclusions are entitled to little, if
any, deference.

5
That these provisions were among those that had a future effective
date, see 124 Stat. at 2018, makes no difference to our analysis. If we
were to apply the “previous” NBA preemption standard and level of
deference to OCC preemption determinations, we would apply, as
explained above, the Barnett Bank standard and Skidmore deference
required by the Dodd-Frank amendments.

Of course, a statute should be “so construed that, if it can be
prevented, no clause, sentence, or word shall be superfluous, void, or
insignificant.” TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (quoting
Duncan v. Walker, 533 U.S. 167, 174 (2001)). But no such superfluity
exists here where the effective date provision applies to the whole
subtitle, which imposes other requirements upon the OCC, and not just
the provisions clarifying the preemption and agency deference standards.
124 Stat. at 2018. In fact, the OCC appears to have interpreted the
effective date in just such a manner. See 76 Fed. Reg. at 43557.
16 LUSNAK V. BANK OF AMERICA

The one substantive change in the law that Dodd-Frank
enacted was to require the OCC to follow certain procedures
in making preemption determinations. Dodd-Frank
mandates that all of the OCC’s future preemption
determinations be made “on a case-by-case basis, in
accordance with applicable law.” 12 U.S.C. § 25b(b)(1)(B).
Under the “case-by-case basis” requirement, the OCC must
individually evaluate state consumer laws and consult with
the Bureau of Consumer Financial Protection before making
any preemption determinations. 12 U.S.C. § 25b(b)(3). In
addition, the OCC may not deem preempted a provision of a
state consumer financial law “unless substantial evidence,
made on the record of the proceeding, supports the specific
finding regarding the preemption of such provision in
accordance with [Barnett Bank].” 12 U.S.C. § 25b(c).
Finally, the OCC must review its preemption determinations
at least once every five years. 12 U.S.C. § 25b(d). These
changes have no bearing here where the preemption
determination is made by this court and not the OCC.

We now turn to the question of whether the NBA
preempts California’s escrow interest law.

B. The NBA Does Not Preempt California’s
Escrow Interest Law

Under both Barnett Bank and Dodd-Frank, we must
determine whether California Civil Code § 2954.8(a)
“prevents or significantly interferes” with Bank of
America’s exercise of its national bank powers. 6 As

6
Ordinarily, affirmative defenses such as preemption may not be
raised on a motion to dismiss except when the defense raises no disputed
issues of fact. Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir. 1984)
(per curiam); see also Rose v. Chase Bank USA, N.A., 513 F.3d 1032,
 LUSNAK V. BANK OF AMERICA 17

Congress provided in Dodd-Frank, the operative question is
whether section 2954.8(a) prevents Bank of America from
exercising its national bank powers or significantly
interferes with Bank of America’s ability to do so. See
12 U.S.C. § 25b(b)(1)(B). Minor interference with federal
objectives is not enough. Watters, 550 U.S. at 11 (“[F]ederal
control shields national banking from unduly burdensome
and duplicative state regulation.” (emphasis added)); id. at
12 (“[W]hen state prescriptions significantly impair the
exercise of authority, enumerated or incidental under the
NBA, the State’s regulations must give way.” (emphasis
added)).

Applying that standard here, we hold that California
Civil Code § 2954.8(a) is not preempted because it does not
prevent or significantly interfere with Bank of America’s
exercise of its powers. Again, section 1639d(g)(3) of Dodd-
Frank states, “If prescribed by applicable State or Federal
law, each creditor shall pay interest to the consumer on the
amount held in any . . . escrow account that is subject to this
section in the manner as prescribed by that applicable State
or Federal law.” 15 U.S.C. § 1639d(g)(3). This language
requiring banks to pay interest on escrow account balances
“[i]f prescribed by applicable State [] law” expresses
Congress’s view that such laws would not necessarily

1038 n.4 (9th Cir. 2008) (declining to remand for further discovery
because “no amount of discovery would change the central holding that
Congress intended for the NBA to preempt [this] state restriction[] on
national banks . . . .”). Such is the case here. Bank of America’s
arguments are purely legal and do not depend on resolution of any factual
disputes over the effect of California law on the bank’s business. Indeed,
Bank of America confirms that “[n]o discovery is necessary . . . because
this is a legal inquiry, not a factual one.”
18 LUSNAK V. BANK OF AMERICA

prevent or significantly interfere with a national bank’s
operations.

Dodd-Frank does not define the term “applicable.” But
the Supreme Court recently explained:

“Applicable” means “capable of being
applied: having relevance” or “fit, suitable, or
right to be applied: appropriate.” Webster’s
Third New International Dictionary 105
(2002). See also New Oxford American
Dictionary 74 (2d ed. 2005) (“relevant or
appropriate”); 1 Oxford English Dictionary
575 (2d ed. 1989) (“[c]apable of being
applied” or “[f]it or suitable for its purpose,
appropriate”). So an expense amount is
“applicable” within the plain meaning of the
statute when it is appropriate, relevant,
suitable, or fit.

Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011);
see also Applicable, Collins English Dictionary 97 (12th ed.
2014) (“being appropriate or relevant”); Applicable, Oxford
Dictionaries (Oxford University Press), https://premium.
oxford dictionaries.com/definition/american_english/
applicable (last visited Jan. 25, 2018) (“[r]elevant or
appropriate”). Accordingly, “applicable” law in the context
of section 1639d(g)(3) would appear to include any relevant
or appropriate state laws that require creditors to pay interest
on escrow account funds.

The inclusion of this term makes sense because not every
state has escrow interest laws. In a regulation implementing
Dodd-Frank’s amendments to the TILA, the Consumer
Financial Protection Bureau explained that:
 LUSNAK V. BANK OF AMERICA 19

[T]he creditor may be able to gain returns on
the money that the consumers keep in their
escrow account. Depending on the State, the
creditor might not be required to pay interest
on the money in the escrow account. The
amount that the consumer is required to have
in the consumer’s escrow account is
generally limited to two months’ worth of
property taxes and home insurance.
However, some States require a fixed interest
rate to be paid on escrow accounts, resulting
in an additional cost to the creditors.

Escrow Requirements Under the Truth in Lending Act
(Regulation Z), 78 Fed. Reg. 4726, 4747 (Jan. 22, 2013).
Lusnak notes that only thirteen states appear to have escrow
interest laws similar to California’s. Through its
requirement that creditors pay interest “in the manner as
prescribed by” the relevant state law, Congress demonstrated
an awareness of, and intent to address, the differences among
state escrow interest laws. 15 U.S.C. § 1639d(g)(3). “[W]e
may reasonably presume that Congress was aware of
[existing law when it legislated],” Do Sung Uhm v. Humana,
Inc., 620 F.3d 1134, 1155 (9th Cir. 2010), and that it used
the term “applicable” to refer to state escrow interest laws
where they exist. 7

7
In so construing the term “applicable,” we do not suggest that a
state escrow interest law can never be preempted by the NBA. For
example, a state law setting punitively high rates banks must pay on
escrow balances may prevent or significantly interfere with a bank’s
ability to engage in the business of banking. We simply recognize that
Congress’s reference to “applicable State . . . law” in section 1639d(g)(3)
reflects a determination that state escrow interest laws do not necessarily
prevent or significantly interfere with a national bank’s business.
20 LUSNAK V. BANK OF AMERICA

Although we need not resort to legislative history, we
note that it, too, confirms our interpretation of
section 1639d(g)(3). A House Report discusses how
mortgage servicing, and specifically escrow accounts,
contributed to the subprime mortgage crisis. H.R. Rep. No.
111-94, at 53–56. The Report notes that mortgage servicers
are typically “large corporations” who “may . . . earn income
from the float from escrow accounts they maintain for
borrowers to cover the required payments for property
insurance on the loan.” Id. at 55. The Report’s section-by-
section analysis of Dodd-Frank then explains Congress’s
purpose behind section 1639d(g)(3), stating:

Servicers must administer such accounts in
accordance with the Real Estate Settlement
Procedures Act (RESPA), [Flood Disaster
Protection Act], and, if applicable, the law of
the State where the real property securing the
transaction is located, including making
interest payments on the escrow account if
required under such laws.

Id. at 91 (emphasis added). This passage shows Congress’s
view that creditors, including large corporate banks like
Bank of America, can comply with state escrow interest laws
without any significant interference with their banking
powers.

No legal authority supports Bank of America’s position
that California Civil Code § 2954.8(a) prevents or
significantly interferes with the exercise of its powers. Bank
of America falls back on the OCC’s pre-Dodd-Frank
preemption rule, 12 C.F.R. § 34.4(a) (2004), but as we
explained, Congress has since clarified that Barnett Bank’s
preemption standard applies. Bank of America’s reliance on
 LUSNAK V. BANK OF AMERICA 21

the OCC’s post-Dodd-Frank revision of section 34.4(a) also
fails. Reading section 34.4(a) in isolation, Bank of America
argues that state escrow interest laws necessarily prevent or
significantly impair its real estate lending authority.
However, the OCC’s amendments specifically altered the
language of section 34.4(b) to clarify that state laws “that
[are] made applicable by Federal law” (which would include
Dodd-Frank’s TILA amendments) “are not inconsistent with
the real estate lending powers of national banks . . . to the
extent consistent with [Barnett Bank].” 12 C.F.R.
§ 34.4(b)(9) (2011).

All of Bank of America’s cited cases are inapposite.
Flagg v. Yonkers Savings & Loan Association concerned the
Office of Thrift Supervision’s (“OTS”) authority to regulate
federal savings associations, and the Second Circuit’s
holding in that case was based on the OTS’s field preemption
over the regulation of such associations. 396 F.3d 178, 182
(2d Cir. 2005). Unlike the OTS, the OCC does not enjoy
field preemption over the regulation of national banks. 8
Aguayo, 653 F.3d at 921–22 (“[W]hile the OTS and the OCC
regulations are similar in many ways . . . the OCC has
explicitly avoided full field preemption in its rulemaking and
has not been granted full field preemption by Congress.”).
First Federal Savings and Loan Association of Boston v.
Greenwald also fails to support Bank of America’s position.
591 F.2d 417 (1st Cir. 1979). Greenwald concerned a direct
conflict between a state regulation requiring payment of
interest on certain escrow accounts and a federal regulation
expressly stating that no such obligation was to be imposed
on federal savings associations “apart from the duties

8
Nor does the OCC enjoy field preemption over the regulation of
federal savings associations. 12 U.S.C. § 1465(b).
22 LUSNAK V. BANK OF AMERICA

imposed by this paragraph” or “as provided by contract.” Id.
at 425. Here, there is no federal regulation that directly
conflicts with section 2954.8(a). 9

In sum, no legal authority establishes that state escrow
interest laws prevent or significantly interfere with the
exercise of national bank powers, and Congress itself, in
enacting Dodd-Frank, has indicated that they do not.
Accordingly, we hold that the NBA does not preempt
California Civil Code § 2954.8(a).

C. Lusnak’s Claims For Relief

We turn now to Lusnak’s two claims for relief. Using
the UCL as a procedural vehicle, Lusnak alleges that Bank
of America violated both state law, Cal. Civ. Code
§ 2954.8(a), and federal law, 15 U.S.C. § 1639d(g)(3), by
failing to pay interest on his escrow account funds. See
Levitt v. Yelp! Inc., 765 F.3d 1123, 1130 (9th Cir. 2014) (“In
prohibiting ‘any unlawful’ business practice, the UCL
‘borrows violations of other laws and treats them as unlawful
practices that the unfair competition law makes
independently actionable.’”). Lusnak also brings a state-law
breach of contract claim, alleging that Bank of America’s
failure to pay interest violated his mortgage agreement.

9
Bank of America’s district court authorities are nonbinding and
unpersuasive. See Hayes v. Wells Fargo Bank, N.A., No. 13cv1707
L(BLM), 2014 WL 3014906 (S.D. Cal. Jul. 3, 2014); Wis. League of Fin.
Insts., Ltd. v. Galecki, 707 F. Supp. 401 (W.D. Wis. 1989). As in Flagg,
the court in Hayes based its holding on the OTS’s field preemption over
the regulation of federal savings associations. 2014 WL 3014906, at *5.
And Galecki concerned the regulatory authority of the Federal Home
Loan Bank Board, which was “preemptive of any state law purporting to
address the subject of the operations of a Federal [savings] association.”
707 F. Supp. at 404 (quoting 12 C.F.R. § 545.2).
 LUSNAK V. BANK OF AMERICA 23

Bank of America—failing to distinguish between
Lusnak’s state and federal theories—argues that his UCL
claim cannot proceed because his escrow account was
created before section 1639d’s effective date of January 21,
2013. 124 Stat. at 2136. We agree that Lusnak cannot rely
on section 1639d in prosecuting his UCL claim. Section
1639d mandates that creditors establish escrow accounts in
connection with certain mortgages. See 15 U.S.C.
§ 1639d(a)–(b). Specifically, section 1639d(a) states that “a
creditor, in connection with the consummation of a
consumer credit transaction secured by a first lien on the
principal dwelling of the consumer . . . shall establish,
before the consummation of such transaction, an escrow or
impound account . . . as provided in, and in accordance with,
this section.” 15 U.S.C. § 1639d(a) (emphasis added). The
use of prospective language, specifically “shall establish,
before the consummation of such transaction,” indicates that
Congress intended the detailed requirements in section
1639d to apply to accounts established pursuant to that
section after it took effect in 2013.

Moreover, section 1639d(g)(3) requires creditors to pay
interest under “applicable” state law on funds in federally
mandated escrow accounts that are “subject to this section.”
15 U.S.C. § 1639d(g)(3). Lusnak’s escrow account was not
a federally mandated account “subject to” section 1639d at
the time it was created because it was established before that
section took effect in 2013. See Bowen v. Georgetown Univ.
Hosp., 488 U.S. 204, 208 (1988) (“[C]ongressional
enactments . . . will not be construed to have retroactive
effect unless their language requires this result.”).

However, these conclusions do not preclude Lusnak
from obtaining relief under the UCL. Because California
Civil Code § 2954.8(a) is not preempted, Bank of America
24 LUSNAK V. BANK OF AMERICA

was required to follow that law, and Lusnak may proceed on
his UCL claim on the theory that Bank of America violated
the UCL by failing to comply with section 2954.8(a). The
parties argue over when exactly Bank of America’s
obligation to comply with section 2954.8(a) might have
begun. Given that the Barnett Bank standard applied both
pre- and post-Dodd Frank, the preemption analysis is the
same in both time periods. Therefore, because section
2954.8(a) was not preempted when Bank of America
assumed control over Lusnak’s pre-existing escrow account,
Bank of America’s obligation to pay interest on any funds in
Lusnak’s escrow account was triggered from that point
forward.

Lusnak may also proceed on his breach of contract claim.
Lusnak’s mortgage documents require Bank of America to
pay escrow interest if “Applicable Law requires interest to
be paid on the Funds.” The mortgage defines “Applicable
Law” as “all controlling applicable federal, state and local
statutes, regulations, ordinances and administrative rules and
orders (that have the effect of law) as well as all applicable
final, non-appealable judicial opinions.” Accordingly, on
the allegations in the complaint, a jury could find that the
“Applicable Law” provision of the contract also requires that
Bank of America pay interest on funds in Lusnak’s escrow
account.

IV. Conclusion

For the reasons set forth above, we REVERSE and
REMAND the case for further proceedings consistent with
this Opinion.