The Future is Dim for Fair Lending Claims Based on a Discretionary Pricing Policy

By Stephen A. Fogdall

In Rodriguez v. National City Bank, the United States Court of Appeals for the Third Circuit just dealt a significant blow to classwide litigation of fair lending claims based on a bank’s “discretionary pricing policy.”  Such claims have been increasingly common in the aftermath of the 2007-2008 financial crisis.  These claims typically are based on the allegation that the bank gives its loan officers discretion to adjust a borrower’s interest rate or fees based on subjective factors independent of the borrower’s creditworthiness.  This discretion is alleged to result in minority borrowers paying a higher price for loans than nonminority borrowers.

Discretionary pricing claims are usually framed using a “disparate impact theory” under the Fair Housing Act or the Equal Credit Opportunity Act.  The viability of such claims has already been brought into question by the U.S. Supreme Court’s recent grant of certiorari in a case to decide whether the Fair Housing Act allows for disparate impact liability.  (For more discussion on that topic, click here.) Now the Third Circuit has ruled that such claims, as typically framed, cannot be brought on a classwide basis, even if they are otherwise legally viable.  In Rodriguez, the parties agreed to settle claims that the bank caused minority borrowers to pay more for loans than nonminority borrowers due to loan officers’ discretion to set points, fees and other charges.  The district court refused to approve the settlement, finding that certification was foreclosed by the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).  The Third Circuit granted the plaintiffs’ petition to appeal that ruling, but affirmed it.

The Third Circuit’s analysis followed the Duke decision closely.  The Third Circuit emphasized that the plaintiffs were required to prove that Rule 23’s commonality requirement was satisfied notwithstanding that the parties had agreed to settle the case.  The plaintiffs argued that they had established commonality using a statistical analysis of loan data produced by the bank, which they said controlled for all “objective credit and risk factors impacting loan pricing” and showed that the discretionary pricing policy had a discriminatory effect.

The Third Circuit ruled that this statistical analysis (which was not in the record) could not establish commonality by a preponderance of the evidence, because it did not show “that there was a common and unlawful mode by which the officers exercised their discretion,” and therefore did not establish that the alleged discriminatory effect was tied to a specific policy of the bank.  Individual loan officers may have exercised their discretion based on factors that, while subjective, had nothing to do with a borrower’s race.  Moreover, the analysis was based on national data from tens of thousands of borrowers at 1,400 bank branches.  A “very significant disparity at one branch or region could skew the average, producing results that indicate a national disparity, when the problem may be more localized.”

In short, the Third Circuit concluded, “the exercise of broad discretion by an untold number of unique decision-makers in the making of thousands upon thousands of individual decisions undermines the attempt to claim, on the basis of statistics alone, that the decisions are bound together by a common discriminatory mode.”

The Third Circuit’s analysis leaves open the possibility that a plaintiff might be able to establish commonality by limiting the class to borrowers in a specific region, or at an individual branch, or perhaps even borrowers who obtained loans through a specific loan officer, and then demonstrating disparate impact using statistics for these borrowers alone.  However, plaintiffs and plaintiffs’ lawyers are unlikely to find claims this finely grained worth pursuing.  Thus, it is difficult to see a future for disparate impact claims based on a discretionary pricing policy following the Third Circuit’s decision in Rodriguez.

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