Flagstar Bank Illegally Withheld Millions of Dollars From Homeowners

EvilCorporations.com • Case No. 21-15667, U.S. Court of Appeals, Ninth Circuit • 53 min read

What Being Cheated Out of Your Own Money Actually Feels Like

What the Court Documents Actually Say: Verbatim

The following quotes are taken directly from the published Ninth Circuit opinion in Kivett v. Flagstar Bank, FSB, No. 21-15667, filed October 2, 2025. No paraphrasing. No interpretation added before you read them.

“Flagstar acknowledged that it did not pay interest on any escrow accounts until 2017—when it began paying interest on subserviced escrow accounts only—as required by California Civil Code § 2954.8(a).”

— Majority Opinion, Judge Bybee, p. 7

• This is a direct admission in the court record. Flagstar’s own conduct is not disputed. The bank held California homeowners’ escrow money for years and paid them nothing, knowing the law required payment.
• The date “2017” matters. The case class period runs through 2018. The bank began partial compliance only when legal pressure was already mounting, and only for a subset of accounts that did not include the class members suing them.

“Flagstar took the position that the NBA preempted § 2954.8(a) and, because the California law was invalid, Flagstar was not required to pay interest on funds held in escrow accounts.”

— Majority Opinion, Judge Bybee, p. 7

• This was Flagstar’s actual legal defense: that federal law made California’s consumer protection requirement null and void. The bank did not dispute that it owed money if the law applied. It argued the law did not apply to it.
• Multiple federal courts, from the district court through the Ninth Circuit, rejected this argument each time Flagstar raised it.

“According to the Nation’s top banking regulator, Lusnak ‘comprehensively misinterpreted’ Barnett Bank by ‘invert[ing]’ its expectation that the NBA’s enumerated and incidental powers will ordinarily preempt contrary state law.”

— Dissent, Judge R. Nelson, p. 25–26, quoting OCC Amicus Brief

• The Office of the Comptroller of the Currency is the federal agency that regulates national banks. Even they told the Supreme Court that the prior circuit precedent Flagstar was relying on to avoid paying was “comprehensively” wrong.
• The OCC’s position was that Flagstar’s legal theory was based on an inverted, backwards reading of federal preemption law. This was the bank’s regulator, essentially agreeing the bank had been using a flawed legal argument.

“The United States agreed with Flagstar that Lusnak was wrongly decided. Lusnak ‘erred in treating Section 1639d as determinative of the preemption question.’ In other words, Lusnak ‘elided’ the ‘practical, degree-of-interference assessment’ that Dodd-Frank ‘requires.'”

— Dissent, Judge R. Nelson, p. 33–34, quoting U.S. Amicus Brief

• The United States government filed a friend-of-the-court brief saying Flagstar’s preferred legal framework was bad law. This is significant: the federal government was essentially telling the court that a rule being used to block consumer restitution was built on a legal error.
• Despite this, the majority held that the prior Ninth Circuit ruling was still binding until overturned by the full court, meaning the class still prevailed, but the debate over whether this protection will survive future challenges is far from settled.

“[A] 2% interest rate is ‘six times higher than the long-run average of .32% paid by FDIC-insured U.S. depository institutions on certificates of deposit.'”

— Dissent, Judge R. Nelson, footnote 2, p. 34, quoting Bank Policy Institute Amicus Brief

• This number, supplied by a banking industry group trying to help Flagstar win, is an unintentional confession. It proves banks have been paying homeowners almost nothing on their escrow balances for years, not because the money was not there, but because no one made them pay.
• California’s law was not a punitive rate. It was a floor that was six times what banks voluntarily paid elsewhere. The gap between 0.32% and 2% is the amount the industry has been keeping that legally belonged to borrowers in states without escrow interest laws.

“California’s IOE law—by making it more costly for national banks to offer and service mortgage escrow accounts for properties located in California—’frustrat[es] the purpose for which’ the national banking system was created. If the NBA did not preempt IOE laws like California’s, national banks would be subject to ‘[d]iverse and duplicative’ state regulation of mortgage escrow accounts, which is ‘precisely what the NBA was designed to prevent.'”

— Dissent, Judge R. Nelson, p. 45–46

• This is the dissenting judge’s argument for why California’s law should be wiped out entirely. The argument is that making banks pay interest on escrow “frustrates” the purpose of the national banking system. Read plainly: the dissent’s view is that forcing banks to pay money they owe to borrowers is an unconstitutional burden on the banking industry.
• This argument did not win. But one dissenting judge on a three-judge panel means this case is one future appeal away from potentially going the other way at the en banc level or before a differently constituted Supreme Court.

Who Gets Hurt When Banks Withhold Interest on Escrow

Public Health

Escrow account stripping is a financial health harm. The population most affected by unpaid escrow interest is the same population most financially stressed by homeownership costs.

• Homeowners who carry mortgage escrow accounts are disproportionately first-time buyers and lower-to-middle-income households who cannot qualify for loans without the escrow requirement. These borrowers are the most dependent on every dollar of the loan relationship, and the least able to absorb unpaid obligations from their servicer.
• The court record reflects that Flagstar administered escrow accounts for property taxes and insurance premiums. When a bank holds that money without paying the legally required return, it is effectively running a hidden cost surcharge on the most financially fragile part of the homeowner market.
• Financial stress from housing costs is directly linked to documented public health outcomes including hypertension, anxiety disorders, and disrupted sleep. A nine-million-dollar unpaid obligation spread across a class of California borrowers represents real cumulative economic stress with real physiological consequences that no settlement will fully compensate.
• The dissent’s calculation that banks nationally pay an average of 0.32% on equivalent accounts means that in the 12 states without escrow interest laws, millions of borrowers are in the same position these plaintiffs were in California: their money is being held, used, and returned without any interest, legally, with no recourse.

Economic Inequality

The structure of this case illustrates exactly how wealth transfers upward through financial services when consumer protection laws are undermined or ignored.

• Flagstar earned the float on homeowners’ escrow balances. “Float” is the profit a financial institution earns by investing or lending out money it is temporarily holding. Every dollar of escrow interest not paid to borrowers is a dollar of float the bank kept for itself.
• The class in this case represents California borrowers who used Flagstar as their mortgage servicer. These are not wealthy investors. These are people paying property taxes and homeowner’s insurance through a mandatory holding account. The bank had every structural advantage: it held the money, it set the policy, and it had a legal team that could run seven years of litigation.
• The Ninth Circuit noted that Congress has rejected federal mandatory escrow interest three separate times (1973, 1991, 1993). This means the only protection homeowners in most states have is whatever their state legislature has managed to pass. Flagstar’s litigation strategy was aimed at eliminating even that.
• At least 12 states have interest-on-escrow laws similar to California’s. The banking industry groups that filed briefs in this case made clear they want preemption to apply nationally. A win for Flagstar would have retroactively stripped protection from homeowners in all of those states simultaneously.
• The $9,180,580.15 judgment sounds large. Divided across a class of California borrowers over multiple years, it is a relatively modest recovery for each individual. The costs of mounting a federal class action lawsuit to get it were enormous. This asymmetry is how underpayment at scale persists: each individual harm is too small to litigate alone, and class action is the only tool that makes enforcement economically rational for anyone except the bank.
• The bank’s strategy of paying interest on subserviced accounts only in 2017 reflects a calculated compliance policy. Flagstar chose to comply where it had a contractual relationship with another institution watching closely, and chose not to comply for individual homeowners who were less likely to notice or have the resources to sue.

The Number Behind the Case

The Fight Continues: What You Can Do and Who to Watch

The majority ruling protects California homeowners for now, but a single dissent and ongoing industry pressure mean this legal protection is in active danger. Here is who holds accountability, and where real-world pressure can be applied.

Leadership and Decision-Makers of Record

• Flagstar Bank, FSB is the named defendant-appellant throughout this case. The bank is now a subsidiary of New York Community Bancorp (NYCB). The executive leadership of NYCB now bears institutional responsibility for Flagstar’s conduct and the final judgment.
• Counsel for Flagstar: Jonathan Y. Ellis (argued), Kathryn M. Barber, Brian D. Schmalzbach, Carolee A. Hoover, and David C. Powell of McGuireWoods LLP. These are the attorneys who prosecuted the multi-year appeal effort on the bank’s behalf.
• Class counsel for homeowners: Peter B. Fredman (Law Offices of Peter B. Fredman PC), Steve Berman, Thomas E. Loeser, and Craig R. Spiegel (Hagens Berman Sobol Shapiro LLP). These attorneys represented the class through seven years of litigation.

Regulatory Watchlist

• Office of the Comptroller of the Currency (OCC): The OCC is the primary federal regulator of national banks including Flagstar. The OCC filed an amicus brief in this case agreeing that Lusnak was wrongly decided, signaling internal regulatory disagreement about the scope of escrow interest protections. Monitor OCC rulemaking on NBA preemption standards.
• Consumer Financial Protection Bureau (CFPB): The CFPB oversees compliance with RESPA and TILA, the federal mortgage statutes at the center of this case. The CFPB has authority to issue rules on escrow account management. Any rollback of escrow consumer protections at the CFPB will directly affect the viability of state-level escrow interest laws.
• California Department of Financial Protection and Innovation (DFPI): The state-level regulator responsible for enforcing California Civil Code § 2954.8(a). The DFPI can bring enforcement actions against servicers who are not complying with the escrow interest requirement. If you are a California homeowner and your mortgage servicer is not paying escrow interest, the DFPI is the first place to file a complaint.
• Federal Reserve / FDIC: Both agencies have supervisory authority over financial holding companies, including NYCB (Flagstar’s parent). Systemic noncompliance with state consumer financial laws by federally supervised institutions falls within their examination scope.
• State Legislatures in the 38+ states without escrow interest laws: The most direct protection against bank float exploitation is a state-level interest-on-escrow statute. Legislative advocacy at the state level is the single highest-leverage action available to homeowners in unprotected states.

Direct Action and Mutual Aid

• Check your escrow statements now. If your mortgage is serviced by a bank in California, your servicer is legally required to pay you at least 2% annual interest on your escrow balance under Cal. Civ. Code § 2954.8(a). If you are not receiving it, contact the DFPI and a consumer protection attorney. Class action standing may already exist.
• Contact your state legislator if you live outside California. Twelve states have escrow interest laws. Yours may not be one of them. Find your state representative and demand a state escrow interest bill. The National Consumer Law Center and the Conference of State Bank Supervisors (which filed an amicus brief supporting the homeowners in this case) publish model legislation.
• Support class action infrastructure. Organizations like the National Consumer Law Center, the National Association of Consumer Advocates, and local legal aid organizations fund and resource exactly this kind of litigation. Without them, seven-year class actions against banks with unlimited legal budgets do not happen.
• Track en banc and Supreme Court developments. The majority opinion explicitly states that correction of Lusnak, if any is warranted, must come from the full Ninth Circuit sitting en banc, or from the Supreme Court. One future petition could reopen this entire question. Follow the case docket at the U.S. Courts of Appeals for the Ninth Circuit under case No. 21-15667.
• Oppose industry lobbying on Dodd-Frank preemption provisions. The banking trade groups that filed briefs in this case are actively lobbying Congress to broaden federal preemption of state consumer financial laws. Track lobbying disclosures from the American Bankers Association, Bank Policy Institute, and Mortgage Bankers Association on preemption-related bills.