mortgage contract.jpgBy Lynn Kappelman and Chris Palamountain

The U.S. District Court for the District of Massachusetts has joined a growing chorus of courts willing to apply the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), beyond the employment class action context. In Barrett v. Option One Mort. Corp., Case No. 08-10157, 2012 WL 4076465 (D. Mass. Sept. 18, 2012),  Judge Zobel decertified a class of African-American borrowers who obtained home mortgage loans with pricing based in part on a discretionary fee component. 

Three months before the Supreme Court issued the Wal-Mart decision, Judge Zobel had certified a class of African-Americans who had obtained home mortgage loans from the defendants, collectively referred to as “Option One,” through mortgage brokers. The Option One loans were priced using a two-step process. During the first step the lenders established a “par rate” based on the borrower’s credit-worthiness. To establish that “par rate” the lender looked at such objective factors as the borrower’s credit score and the value of the property he wanted to mortgage. The discretionary component of the loan price authorized defendants’ brokers to set interest rates higher than the par rate and to charge loan origination and processing fees. Brokers thus had discretion to use higher rates and fees up to a maximum rate that Option One established. Option One paid the brokers more for loans that yielded higher rates. 

Plaintiffs’ expert, Yale Law School law-and-economics guru Ian Ayers, prepared a regression analysis comparing the annual percentage rates (“APRs”) that white and minority borrowers had paid for defendants’ loans originated between 2001 to 2007. That analysis showed that African-American borrowers had nationwide APRs 0.086% higher than those for similarly situated white borrowers. This difference was the basis for the Plaintiffs’ disparate impact claims which they pursued as a class action under the Equal Credit Opportunity Act, 42 U.S.C. §§ 1691-1691f (“ECOA”) and the Fair Housing Act, 42 U.S.C. §§ 3601-3619 (“FHA”). 

After the Supreme Court handed down the Wal-Mart decision, defendants moved to decertify the class on grounds that the Supreme Court’s commonality analysis regarding discretionary employment decisions applied with equal force to a nationwide class of borrowers whose discrimination claims rest on the lenders’ discretionary decision-making in loan pricing. In an effort to salvage their class, Plaintiffs attempted to distinguish Wal-Mart and establish commonality under Rule 23 with three arguments. First, Plaintiffs argued that plaintiffs’ claims satisfied the commonality requirement in Rule 23 because lenders had used the same two-stage process to set the class members’ mortgage rates. The Court easily disposed of this argument by pointing out that the objective element of the process was not at issue, and Plaintiffs failed to identify any common practice the brokers used in the challenged discretionary step. Second, Plaintiffs argued that because the loans terms themselves reflected the brokers’ exercise of discretion, their case presented a more manageable way to evaluate the exercise of discretion than the plaintiffs presented in Wal-Mart. The Court acknowledged that since there were written loan terms, this made the case factually different from Wal-Mart, but stated that the difference had no legal effect, because it did not raise any common questions. Finally, Plaintiffs argued that the brokers’ common profit motive could satisfy Rule 23’s commonality requirement. The Court disposed of this argument by finding that “[e]ven if driven by a common profit motive, the brokers could have made widely different decisions in pursuit of that profit motive.” Id. at *9. In light of Plaintiffs’ failure to establish commonality, the Court decertified the class.

This is yet another example of how Defendants can use the Supreme Court’s Rule 23 commonality analysis in Wal-Mart to undermine a variety of different types of class actions outside of the employment context.