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Mortgage Lenders Defeat Would-Be Class Actions
By Frank H. Bishop and Catherine C. Worthington

Mortgage lenders in the U.S. Court of Appeals for the Third Circuit and Sixth Circuit won would-be class action lawsuits in recent months thanks to the U.S. Supreme Court's landmark decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).

In Dukes, the U.S. Supreme Court refused to certify a proposed class of 1.5 million women who alleged that Wal-Mart's practices regarding employee pay and promotions were discriminatory. The Supreme Court found that pay and promotion decisions at Wal-Mart were at the discretion of local managers, subject to certain boundaries on the size of salary increases and on minimal eligibility requirements. The Supreme Court concluded that the proposed class could not prove that there were questions of law or fact common to the class because, in the context of a broad delegation of decision making to the discretion of local managers, "[t]he only corporate policy that the plaintiffs' evidence convincingly establishes is Wal-Mart's 'policy' of allowing discretion by local supervisors over employment matters. On its face, of course, that is just the opposite of a uniform employment practice that would provide the commonality needed for a class action; it is a policy against having uniform employment practices."

The Dukes decision has had a major impact on the mortgage lending industry's ability to defend class action litigation challenging lenders' discretionary pricing policies. Two recent examples of this impact are Rodriguez v. National City Bank, 2013 U.S. App. LEXIS 16615 (3d Cir. (E.D. Pa.) August 12, 2013) and In re Countrywide Financial Corp. Mortgage Lending Practices Litigation (Miller v. Countrywide Bank, N.A.), 2013 U.S. App. LEXIS 924 (6th Cir. (W.D. Ky.) January 15, 2013).

In Rodriguez, several African-American and Hispanic borrowers obtained mortgage loans from National City Bank. These borrowers filed a class action against National City, alleging a pattern or practice of racial discrimination in the financing of residential home purchases in violation of the federal Fair Housing Act and the Equal Credit Opportunity Act. The borrowers claimed that National City's discretionary pricing policy allowed individual brokers and loan officers to add a subjective surcharge of points, fees, and credit costs to an otherwise objective, risk-based financing rate, the result of which was to charge minority applicants more than similarly-situated Caucasian borrowers. As part of the discovery phase of the lawsuit, National City provided the borrowers with data covering two million loans issued by National City from 2001 to 2008. The parties reached a negotiated settlement under which National City agreed to pay $7 million to the settlement class, but did not concede any wrongdoing. The trial court granted preliminary approval of the settlement and preliminarily certified the proposed settlement class. Shortly thereafter, the U.S. Supreme Court issued its opinion in Dukes. After Dukes, the trial court found that the settlement class did not meet the commonality requirements as set forth by that case and, therefore, concluded that it could not certify the settlement class. Accordingly, the trial court denied the borrowers' motion to accept the settlement. The borrowers appealed.

The U.S. Court of Appeals for the Third Circuit upheld the trial court's ruling by concluding that the settlement class lacked commonality. While courts operate with a strong presumption in favor of voluntary settlement agreements, that presumption does not relieve a court of the requirement to find that the settlement class members share a common question of law or fact, which, in turn, prevents unwarranted or overbroad class definitions under which a class member who was not harmed would be entitled to receive settlement funds. The focus of the commonality requirement was whether National City's harmful conduct was common as to all of the class members. In other words, the borrowers were required to demonstrate that each class member was subjected to the specific challenged practice in roughly the same manner. The appellate court determined that the regression analysis performed by the borrowers on the data provided to them by National City was insufficient to establish commonality because an individual loan officer may have set a borrower's interest rate or fees based upon any number of non-discriminatory factors. The appellate court also was particularly concerned that a significant disparity in one branch or region could skew the average, which would convert a local or regional disparity into a national one.

The U.S. Court of Appeals for the Sixth Circuit came to a similar conclusion in In re Countrywide Financial Corp. Mortgage Lending Practices Litigation. Eleven individuals who obtained home loans from Countrywide Bank, N.A. sought class certification of their claims that Countrywide's loan pricing policy for mortgages disparately impacted minority borrowers, in violation of the Equal Credit Opportunity Act, the Fair Housing Act, and the Civil Rights Act. The plaintiffs did not challenge the objective component of the pricing policy, but challenged the subjective component permitting local agents - such as loan officers, mortgage brokers, and correspondent lenders - to exercise discretion to deviate from the objective par rate, provided that they stayed within the applicable boundaries dictating the range of acceptable deviations from par. The trial court denied class certification, finding that the proposed class could not satisfy Rule 23(a)(2)'s commonality requirement in light of Dukes. See In re Countrywide Financial Mortgage Lending Practices Litigation, 2011 U.S. Dist. LEXIS 118695 (W.D. Ky. October 13, 2011).

The appellate court agreed with the trial court, concluding that Dukes foreclosed the instant proposed class from establishing commonality. The appellate court noted that both cases challenged policies that grant broad discretion to local agents, and both cases involved companies granting that broad discretion within clear boundaries. In neither case did the plaintiffs allege that local agents exceeded those boundaries. The appellate court also noted that in neither case did the plaintiffs allege that, "for acts of discretion taken within these boundaries, a uniform policy or practice guides how local agents exercise their discretion, such that the corporate guidance caused or contributed to the alleged disparate impacts." The appellate court found that, under Dukes, "class members must unite acts of discretion under a single policy or practice, or through a single mode of exercising discretion, and the mere presence of a range within which acts of discretion take place will not suffice to establish commonality."

Finally, the appellate court agreed with the plaintiffs that Dukes does not prevent a finding of commonality in all disparate impact cases involving the exercise of discretion. The appellate court also agreed that statistical analysis may be used to prove disparate impact, but noted that "statistical correlation, no matter how robust, cannot substitute for a specific finding of class-action commonality."

Frank H. Bishop, Jr., is an associate in the Maine office of Hudson Cook, LLP. He can be reached at 207-541-9554 or by email at fbishop@hudco.com.

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 e-mail at cworthington@hudco.com.

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