By Gerald L. Maatman, Jr., Jennifer A. Riley, and Zachary J. McCormack
Duane Morris Takeaways: On May 30, 2024, in Oliver v. Navy Federal Credit Union, No. 1:23-CV-1731, 2024 U.S. Dist. LEXIS 96704 (E.D. Va. May 30, 2024), Judge Leonie M. Brinkema of the U.S. District Court for the Eastern District of Virginia denied class certification in a suit accusing Navy Federal Credit Union (“Navy Federal”) of racial discrimination in violation the Fair Housing Act (“FHA”) and the Equal Credit Opportunity Act (“ECOA”). In denying certification of the proposed class, Judge Brinkema reasoned that the circumstances of each loan application process are so individualized, that to promote the efficient use of resources, the Court allowed the nine plaintiffs to proceed on their federal ECOA and FHA disparate impact claims individually, but not as a class action.
Navy Federal persuaded the Court that its loan approval statistics themselves do not show it acted with discriminatory intent considering plaintiffs failed to show specific facts alleging they were qualified for the mortgage products they sought. However, the Court ruled that the nine plaintiffs sufficiently pled that statistical disparities revealed a disparate impact among non-white loan applicants and that Navy Federal’s underwriting process may have caused these inconsistencies. Therefore, the Court dismissed plaintiffs’ disparate treatment claims, but allowed the disparate impact claims to proceed past Navy Federal’s motion to dismiss.
Case Background
Navy Federal is an American global credit union headquartered in Vienna, Virginia, and is the largest natural member credit union in the United States, both in asset size and in membership, with an estimated $178 billion in assets and 13.5 million members. On February 20, 2024, nine plaintiffs brought a civil action individually and on behalf of other members of a putative class of similarly-situated applicants who applied for original residential purchase mortgages, refinancings, and home equity lines of credit, and were either denied financing or offered financing at less favorable terms than they initially sought. Id. at *5. Specifically, plaintiffs alleged they were the victims of disparate treatment and disparate impact discrimination under both federal and state civil rights laws due to Navy Federal’s mortgage underwriting policies, which had a disparate impact on minority loan applicants and Navy Federal’s refusal to correct those discrepancies constituted intentional discrimination. Id.
Like all mortgage lenders, Navy Federal is required to submit data to the Consumer Financial Protection Bureau under the Home Mortgage Disclosure Act (“HMDA”). Id. at *6. In the complaint filed in February, the plaintiffs relied on three independent reports analyzing Navy Federal’s publicly-available HMDA data. Id. Through these reports, plaintiffs asserted that a disparity in outcomes for minority loan applicants demonstrated that Navy Federal was on notice of the discriminatory impact of its mortgage lending program, and did not act to address the disparity, thus establishing direct or circumstantial evidence of an intent to discriminate. Id.
The first report, from August 2021, analyzed the public 2019 HMDA data and identified financial institutions which had significant racial disparities in mortgage lending. Id. Navy Federal, identified as one such lender, was twice as likely to deny black applicants who applied for mortgages as compared to similarly situated white applicants. Id. at *7. The second report, from November 2022, found that — even after taking credit scores into consideration — credit unions denied mortgages to minority applicants at rates up to 1.9 times higher than similarly qualified white applicants. Id. The third report, from December 14, 2023, involved Cable News Network’s findings that, in 2022, Navy Federal approved mortgages for 48% of black applicants, 56% of Latino applicants, and 77% of white applicants. Id. Navy Federal had the largest disparity of loan approvals among the 50 largest U.S. lenders, according to CNN. Id. at *8.
The Court’s Decision
Plaintiffs asserted two theories of discrimination under the FHA and the ECOA — disparate treatment and disparate impact. Id. at *11. Although similar, a disparate treatment claim requires intentional discrimination, whereas a disparate impact claim requires showing Navy Federal’s loan underwriting process had a disproportionate adverse impact on minorities. Id.
Regarding the disparate treatment claims, Navy Federal persuaded Judge Brinkema that the statistics in these reports themselves did not show it acted with discriminatory intent. Id. at *19. The Court concluded that Plaintiffs failed to show plausible direct or circumstantial evidence of discriminatory intent, and failed to allege facts showing that plaintiffs were qualified for the mortgage products they sought. Id. at *20. Therefore, the Court dismissed those claims. Id.
In analyzing the disparate impact claims, Judge Brinkema ruled that the suit’s nine remaining plaintiffs sufficiently pled that statistical disparities revealed a statistical impact among non-white loan applicants and that Navy Federal’s underwriting process may have caused these inconsistencies. Id. at *22. Allowing these claims to move past the motion to dismiss stage, the Court opined that, during discovery, if the plaintiffs can link Navy Federal’s underwriting process to the precise disparities and adverse consequences experienced by the borrowers — taking into consideration their individualized application criteria — then the Court may revisit whether the claims can survive summary judgment. Id.
Navy Federal also argued its notice of claim provisions precluded several allegations. Id. Judge Brinkema, however, determined that additional notice to Navy Federal would not been futile. Ultimately, Judge Brinkema dismissed the disparate treatment claims, and allowed the disparate impact claims to proceed as well as plaintiffs’ claim for declaratory relief under 28 U.S.C. § 2201.
Implications Of The Decision
Under the HMDA, mortgage lenders are required to submit data to the Consumer Financial Protection Bureau, and therefore should be prepared to defend against disparate impact and disparate treatment claims weaponizing these publicly available statistics. This order illustrates the importance of statistical data in both class action disparate treatment claims and disparate impact claims. It serves as a cautionary tale depicting how reports analyzing HMDA data could bolster claims of discrimination under the ECOA and FHA. Corporate counsel should take note of the Court’s reliance on HMDA data as evidence of discriminatory lending procedures which could have disproportionate adverse effect on minorities, and continue to monitor this space for future developments.
.