“Confirmed Judges, Confirmed Fears” is a blog series documenting the harmful impact of President Trump’s judges on Americans’ rights and liberties. Cases in the series can be found by issue and by judge at this link.

Trump Ninth Circuit judge Ryan Nelson wrote a 2-1 ruling that reversed a district court and ruled that national banks can pay zero interest to consumers on escrow accounts related to loans they purchased from savings associations, despite a California law requiring payment of interest. The September 2020 decision was in McShannock v. JP Morgan Chase Bank.

 Under California law, when homeowners pay money into escrow accounts used by banks to pay real estate taxes and for other purposes, they are entitled to receive at least 2% interest on those funds. JP Morgan Chase Bank acquired and took over all loans issued by Washington Mutual, a federal savings association that failed during the 2008 financial crisis, but refused to pay any interest on those escrow accounts. A class action was filed against Chase by California mortgage loan customers seeking to recover those interest payments. Chase claimed it did not have to pay such interest because the savings association that had made the loans did not have to pay interest under the federal Home Owners Loan Act (HOLA) and moved to dismiss the case.

A federal district court denied the motion. It explained that national banks like Chase are required to pay such interest, and that it could not avoid such payments for the period that it held the loans by trying to rely on HOLA, which does not apply to national banks.  Chase appealed to the Ninth Circuit.

Trump judge Ryan Nelson wrote a 2-1 decision reversing the district court and ruling that Chase could disregard California law and pay no interest to California homeowners on escrow accounts. Even though the Ninth Circuit had previously held that federal law does not prevent California from requiring national banks like Chase to pay interest on escrow accounts, Nelson held that because the loans at issue were “originated by savings associations” that themselves were exempted from paying interest because of HOLA, the banks also did not have to pay interest after they acquired the loans and required consumers to pay into escrow accounts.

Judge James Gwin strongly dissented. He explained that the “statutory text” of HOLA “gives no suggestion” that its exemption from paying interest on escrow accounts applied to banks that purchase loans from savings associations. The majority “justifies its disregard” of the statute’s text, he went on, by suggesting that treating banks differently would make sales of savings association loans more difficult, “even though Congress reached the directly opposite policy judgment” in the Dodd-Frank Act. In any event, Gwin continued, judges “are not legislators charged with weighing the costs and benefit of the escrow interest requirement,” but instead should make their decisions based on the “actual text” of the laws and regulations involved in the case, which the majority failed to do.

Fortunately, as Judge Gwin pointed out, the harmful effect of the majority’s decision will be limited, since federal law now provides that interest must be paid on escrow accounts with respect to loans by national banks and federal savings associations “after January 21, 2013.”  But for homeowners who took out earlier loans as in this case, Trump judge Nelson’s decision means that big banks will be able to use their escrow accounts as the banks please without paying any interest on these substantial sums.