The Conference of State Bank Supervisors celebrated an appellate court's decision not to grant a request by Flagstar Bank for the full panel in an interest-on-escrow case.

The organization used the ruling to call on the Office of the Comptroller of the Currency to end its efforts to create a national preemption. This whole situation was muddied by a U.S. Supreme Court decision in a related state versus national banking law case.

In the latest move, by a two-to-one vote, Flagstar Bank was denied both a panel rehearing and an en banc hearing by the Ninth Circuit Court of Appeals, which had previously affirmed a prior decision upholding California's law.

How a U.S. Supreme Court ruling affected this case

The case went back to the court following the Supreme Court's decision in Cantero v. Bank of America, involving a similar law in New York. In its Cantero ruling, the high court did not definitively declare whether or not the National Banking Act has precedence over state banking law.

Unlike the Ninth Circuit in Kivett v. Flagstar, the Second Circuit had ruled in favor of B of A, creating a split.

Following Cantero, the Supreme Court granted Flagstar's petition to vacate Kivett and remanded it back to the Ninth Circuit.

After a panel rehearing in October, on a two-to-one vote, the court upheld the prior decision against the bank.

In a ruling filed on March 26, the three judges who initially heard the case voted the same way regarding both a further rehearing by them, Jay Bybee and Susan Bolton in favor of Kivett and Ryan Nelson in support of Flagstar.

This also applied on whether to recommend moving the case to the full court; in addition, no other judge on the appellate court's bench requested a vote, the single page ruling said.

However, this could all be for naught. The Office of the Comptroller of the Currency in December fielded two proposals that would resolve the issue in favor of the national banks.

Earlier this month, Jonathan Gould, head of the OCC, reiterated his strong support for the federal preemption.

How state regulators feel about this latest ruling

This latest case reaffirms "the appropriately high bar for preemption" created by the Cantero decision, a statement from the Conference of State Bank Supervisors said.

"The OCC has ignored that standard and Congress's clear direction, instead proposing a much lower threshold to preempt state laws it deems 'inefficient,' 'inflexible,' or 'unusual,'" CSBS continued.

"State interest-on-escrow laws do not prevent or significantly interfere with national bank powers and have long protected homeowners," the group continued, calling on OCC to withdraw its "unlawful proposals."

A request for comment was made to Flagstar.

However, the bank is no longer in the mortgage servicing business. In 2024, it sold the portfolio to Mr. Cooper, which on Oct. 1 became a part of Rocket Cos.