Insights

A recent mortgage case is important across the consumer finance space because it involves claims of discrimination in credit pricing, a charge that the U.S. Justice Department also has used against other lenders and car dealers. It’s also important because the practice under attack is the markup by mortgage brokers of the rates charged by mortgage lenders. And, finally, it’s important because it was a win for the good guys and is a case that any lender defending a discrimination class action will want to know about. Here’s what happened.

In a prior decision, the U.S. District Court for the District of Massachusetts certified a class alleging that the discretionary pricing policy used by certain mortgage brokers had a disparate impact on African-American borrowers, in violation of the Equal Credit Opportunity Act and the Fair Housing Act. The plaintiffs were African-American individuals who obtained home mortgage loans from Option One Mortgage Corporation through mortgage brokers.

The plaintiffs alleged that Option One’s loan pricing policy violated the ECOA and the FHA by giving authorized brokers the discretion to impose additional charges unrelated to a borrower’s creditworthiness and that this policy resulted in higher mortgage rates for African-American borrowers.

In this decision, Option One moved to decertify the class in light of the U.S. Supreme Court’s 2011 decision in Wal-Mart Stores, Inc. v. Dukes. The court granted the motion.

In Wal-Mart, current and former female employees alleged that Wal-Mart’s policy of granting local managers discretion over pay and promotion decisions violated Title VII under a disparate impact theory because local managers disproportionately exercised that discretion in favor of male employees. Under Wal-Mart, a nationwide policy of granting discretion to local units can only raise a common question if the local units have a “common mode of exercising discretion.” The Wal-Mart plaintiffs could not demonstrate commonality just by pointing to a disparate impact in the nationwide average; instead, they would have to show a disparate impact in each store where members of the plaintiff class worked.

In the decision in this case granting class certification, the court found that the plaintiffs had established commonality under Rule 23(a) because the class members’ claims shared a legal and factual question: whether or not Option One’s pricing policy, by granting brokers discretion to set higher rates, resulted in a disparate impact on African-American borrowers.

However, in this decision, in light of Wal-Mart, the court noted that the plaintiffs did not point to any “common mode of exercising discretion” shared by all of Option One’s brokers. Because the plaintiffs did not allege that all of Option One’s brokers exercised their discretion in the same way, they did not raise a single question common to all of the plaintiffs in the class.

The Supreme Court’s Wal-Mart opinion also disapproved of the use of aggregate, nationwide statistics to prove a common method of exercising discretion at the local level. The plaintiffs had supported their commonality argument with a statistical analysis that compared the annual percentage rate paid by white and minority borrowers for Option One wholesale loans originated from 2001 to 2007. This statistical analysis showed that, on average, nationwide, African-American borrowers paid more for their loans than similarly situated white borrowers.

Under Wal-Mart, this type of analysis is no longer sufficient to establish commonality. In this decision, the court found that the statistical analysis used to support commonality examined aggregate data at a national level, rather than considering each broker individually. The plaintiffs can only prove a common question if they show a common disparate impact at the level of each individual broker, thereby raising the inference that the brokers shared a common mode of exercising their discretion.

This decision should provide some guidance for lenders and their lawyers as they search for ways to better insulate operations from private discrimination lawsuits. Although we and other lawyers often urge lenders to adopt standardized, written policies for their operations, this decision may suggest that a little disorganized mayhem in marking up buy rates is preferable to a uniform, written policy that can be successfully attacked in a class action. But that question is one a lender needs to noodle through with its lawyer.

Barrett v. Option One Mortgage Corporation, 2012 U.S. Dist. LEXIS 132775 (D. Mass. September 18, 2012).

Catherine C. Worthington is a Managing Editor of CARLAW, HouseLaw, and PrivacyLaw and is a lawyer in the Maryland office of Hudson Cook, LLP. She can be reached at 410-782-2349 or by email at cworthington@hudco.com.