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From Banking and Finance Law Daily, August 12, 2013

Nationwide mortgage loan discrimination suit could not be settled on class action basis

By Richard A. Roth, J.D.

A proposed class of 153,000 African-American and Hispanic borrowers suing for alleged mortgage loan pricing discrimination could not establish that members of the class all shared a common question of law or fact, the U.S. Court of Appeals for the Third Circuit has determined. The court affirmed a federal district court’s decision to refuse to certify a class to proceed with a negotiated settlement of the proposed class action because the class representatives could not show that there was a lender policy that affected all of the class members “in roughly the same manner” (Rodriguez v. National City Bank, Aug. 12, 2013, Jordan, Circuit Judge).

The consumers’ claims arose from what they termed the bank’s discretionary pricing policy, which they said allowed individual brokers and loan officers to add points, fees, and other credit costs to loan prices that had been determined in an otherwise objective manner. As a result of the policy, the consumers claimed, minority group members who borrowed from the bank paid higher non-risk related charges than similarly situated white borrowers.

The consumers claimed that an analysis of data produced by the bank during the discovery process supported their claims that the bank’s policy had a disparate and discriminatory impact on minority borrowers. The class and the bank engaged in mediation that resulted in a proposed settlement of the class claims, which received preliminary approval by the trial court. The analysis, however, was never submitted to the court.

Rejection of settlement. Between the preliminary approval and the hearing on final approval, the U.S. Supreme Court issued its opinion in Wal-Mart Stores v. Dukes (131 S.Ct. 2541( 2011)), which tightened the standards for the approval of a class in a discrimination suit. The district court eventually determined that the consumers could not satisfy the Dukes standard because demonstrating that the members of the class all shared a common question of law or fact—referred to as commonality—would require them to analyze the disparate impact of the actions of each individual loan officer or, at the least, of each group of loan officers under a specific supervisor. An analysis of company-wide data was inadequate to show commonality, the trial court said.

Because there was no commonality, the class could not be certified, and the settlement could not be approved, the trial court decided.

The consumers appealed, challenging the level of the trial court’s inquiry into commonality and the resulting decision.

Court role in considering settlement. The commonality requirement is imposed by Federal Rule of Civil Procedure 23(a), the court began. All class actions must demonstrate commonality, but the requirement is of the greatest importance in the context of a settlement, in order to ensure that an overly broad settlement agreement does not end the claims of persons who should not properly have been included. As a result, district courts have a duty to be sure that commonality is present, the court said.

The class representatives asserted that the policy of encouraging the voluntary settlement of litigation argued that the trial court should have engaged in a more narrow inquiry into commonality that would have respected the negotiated settlement reached with the bank.

As strong as the policy in favor of settlements might be, it could not override the requirements of the rules of procedure, the court said. A rigorous analysis of whether the class met the rule’s requirements, including the requirement of commonality, was necessary. It also was appropriate for the trial court to require the class to produce evidence demonstrating commonality, the appellate court said.

Other arguments with the trial court’s decision to inquire into commonality also were rejected by the appellate court. The trial court had to engage in a review that was more than a rubber stamp of the settlement, the court said.

Absence of commonality. Commonality requires that the class representatives share at least one question of law or fact with the other class members, the appellate court said. Dukes said that, in the context of an employment discrimination suit over a discretionary policy, commonality requires more than showing that the discretionary system results in a discriminatory effect, according to the court. Commonality requires that the class identify the specific employment practice and show that each member of the class was affected by that practice in roughly the same manner.

If different managers made different decisions for different reasons—some of which were possibly not discriminatory—there would not be commonality, the court explained. The mortgage lending case had “a striking resemblance to Dukes,” the court then said.

The class representatives claimed that the bank had given brokers and loan officers the discretion to increase or decrease loan prices after an objective determination of eligibility, the court said. The exercise of this discretion might have had a discriminatory impact. However, in order to show commonality, the class had to show that the bank’s grant of discretion was a specific practice that affected all of the class members in the same general manner, according to the court.

The statistical analysis offered by the class failed to satisfy the requirement that they identify a specific practice or policy, the court concluded. The analysis likely could not have controlled for every objective credit-related variable, the court said, and made no effort to control for “individual, subjective considerations.” Some of those considerations would not have been discriminatory, the court added.

Moreover, even if the class had identified a specific policy, they had not shown that the policy affected all class members in the same way, the court continued. The 153,000 members of the class hailed from different regions of the country and worked with more than 1,400 different branches of the bank, the court pointed out. Data that was aggregated on a nationwide basis would not show that class members in each location were affected by the bank’s discretionary policy in the same way or to the same extent.

The case is No. 11-8079.

Attorneys: Peter A. Muhic (Kessler, Topaz, Meltzer & Check) for the plaintiffs. David H. Pittinsky (Ballard Spahr) for the defendants.

Companies: National City Bank; National City Corp.; The PNC Financial Services Group, Inc.

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