Tag Archives: disparate impact

Monday’s Adjudication Roundup

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Wednesday’s Academic Roundup

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Seeking Justice Through Litigation

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AbandonedHouseDelray

Judge Caproni (SDNY) issued an Opinion and Order in Adkins v. Morgan Stanley, No. 12-CV-7667 (May 14, 2015). It opens,

This is one of many cases arising out of the collapse of the housing market. This one comes with a twist: homeowners in Detroit who received subprime loans seek to hold a single investment bank responsible under the Fair Housing Act (“FHA”) for discriminating against African-American borrowers, based on their claim that African-Americans were more likely than similarly-situated white borrowers to receive so-called “Combined-Risk loans.” Plaintiffs allege that Morgan Stanley so infected the market for residential mortgages — and for mortgages written by New Century Mortgage Company, a now defunct loan originator, in particular — that it bears responsibility for the disparate impact of New Century’s lending practices. Although Plaintiffs advance creative theories, their class action lawsuit founders on the requirements of Federal Rule of Civil Procedure 23. (1-2, footnote omitted)

Judge Caproni notes that she is “not unsympathetic to Plaintiff’s claims,” she concludes that this class action lawsuit is an inappropriate vehicle to rectify the wrong that Plaintiffs allege Morgan Stanley perpetrated.” (2) I am not an expert on the law of class actions, but the opinion does seem to identify a number of ways in which the proposed class is “unworkable.” (2)

We are now nearly ten years in from the start of the financial crisis and it seems like we can get a broad sense of whether justice has been served.  My instinct is that many people would say “No,” a resounding “No!”

At first glance that might seem odd, particularly to the shareholders and management of financial institutions who have paid tens of billions of dollars in fines and judgments. But there is a strong sense that those who have been harmed have not been able to get their day in court with those who did the harming. A case like this reveals the limitations of litigation as a means for seeking justice. Not every injustice is capable of being remedied in a court of law.

What does this tell us about preparing for the aftermath of the next crisis? How can laws be changed now to ensure that the right people and institutions are held accountable when it hits? While there are no easy answers to these questions, lawmakers should consider whether the scope of organizational liability is properly defined, whether agents of organizations are properly held accountable and whether organizations working in tandem with each other can be properly held accountable for the harms that they cause collectively. Easier said than done, I know, but still worth the effort.

Wednesday’s Academic Roundup

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Monday’s Adjudication Roundup

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Regression Aggression: Statistics and Disparate Impact

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The Third Circuit affirmed, in Rodriguez et al. v. National City Bank et al., No. 11-8079 (Aug. 12, 2013), the denial of final approval “of the parties’ proposed settlement and certification of the settlement class” in a mortgage loan discrimination case brought by minority borrowers who claimed a disparate impact resulting from how the defendants charged borrowers. (4)

The part of the opinion that I found most interesting (but not compelling) was where it discussed the statistical work that the plaintiffs had done to support their case.  The Court states that

Even if Plaintiffs had succeeded in controlling for every  objective  credit-related variable – something no court could have reviewed because the analyses are not of record – the regression analyses  do not even purport to control for individual, subjective considerations.  A loan officer may have set an individual borrower’s interest rate and fees based on any number of non-discriminatory reasons, such as whether the mortgage loans were intended to benefit other family members who were not borrowers, whether borrowers misrepresented their income or assets, whether borrowers were seeking or had previously been given  favorable loan-to value terms not warranted by their credit status, whether the loans were part of a beneficial debt consolidation, or even concerns the loan officer  may have  had  at the time  for the financial institution irrespective of the borrower. While those possibilities do not necessarily rebut the argument that the Discretionary Pricing Policy opened the door to biases that individual loan officers could have harbored,  they  do undermine the assertion that there was a common and unlawful mode by which the officers exercised their discretion. (26-27)

I have not read the plaintiffs’ study, but the Court’s logic seems suspect to me. I can’t imagine how a statistician would “control for individual, subjective considerations,” particularly as that appears to be an infinite set of variables. Indeed, the Court gives little meaningful guidance as to what a comprehensive regression analysis would look like. What “individual, subjective considerations” would they include?  Where would that data exist to be studied?

The court does note some serious problems with the plaintiffs’ case, including the fact that they did not introduce their data or regression analyses into the record.  But those failings are not sufficient to explain the Court’s reasoning in the selection quoted above.

This case might be ripe for reconsideration or an en banc review, even if just to clarify what the Court wants from plaintiffs in future disparate impact cases.

Racial Discrimination in the Secondary Mortgage Market

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Judge Baer issued an opinion in Adkins et al. v. Morgan Stanley et al., No 1:12-cv-07667 (July 25, 2013), denying Morgan Stanley’s motion to dismiss the plaintiff-homeowners’ Fair Housing Act claims. The homeowners claimed “that Morgan Stanley’s policies and practices caused New Century Mortgage Company to target borrowers in the Detroit, Michigan region for loans that had a disparate impact upon African-Americans” in violation of the FHA. (1)

The Court found that the plaintiffs met their pleading burden sufficient to survive a motion to dismiss:

First, they have identified the policy that they allege has a disproportionate impact on minorities.  That policy consisted of Morgan Stanley

(1) routinely purchasing both stated income loans and loans with unreasonably high debt-to-income ratios,

(2) routinely purchasing loans with unreasonably high loan-to-value ratios,

(3) requiring that New Century’s loans include adjustable rates and prepayment penalties as well as purchasing loans with other high-risk features,

(4) providing necessary funding to New Century, and

(5) purchasing loans that deviated from basic underwriting standards.

Plaintiffs go on to state that these policies resulted in “New Century aggressively target[ing] African-American borrowers and communities . . . for the Combined-Risk Loans.”  (Compl. ¶ 81.) Indeed, Plaintiffs allege in detail the effect that New Century’s lending had upon the African-American community in the Detroit area. (Compl. ¶¶ 115–122).  That lending, according to Plaintiffs, was a direct result of Morgan Stanley’s policies.  And while Plaintiffs do not allege that they qualified for better loans, they allege discrimination based only upon the receipt of these predatory, toxic loans that placed them at high financial risk.  These risks exist regardless of Plaintiffs’ qualifications.  On a motion to dismiss, these allegations are sufficient to demonstrate a disparate impact. (11)

The opinion goes farther afield than the questions presented at points. For instance, Judge Baer writes,

Detroit’s recent bankruptcy filing only emphasizes the broader consequences of predatory lending and the foreclosures that inevitably result.  Indeed, “[b]y 2012, banks had foreclosed on 100,000 homes [in Detroit], which drove down the city’s total real estate value by 30 percent and spurred a mass exodus of nearly a quarter million people.”  Laura Gottesdiener, Detroit’s Debt Crisis:  Everything Must Go, Rolling Stone, June 20, 2013.  The resulting blight stemming from “60,000 parcels of vacant land” and “78,000 vacant structures, of which 38,000 are estimated to be in potentially dangerous condition” has further strained Detroit’s already taxed resources.  Kevyn D. Orr, Financial and Operating Plan 9 (2013).  And as residents flee the city, Detroit’s shrinking ratepayer base renders its financial outlook even bleaker.  Id.  Given these conditions, it is not difficult to conclude that Detroit’s current predicament, at least in part, is an outgrowth of the predatory lending at issue here.  See Monica Davey & Mary Williams Walsh, Billions in Debt, Detroit Tumbles Into Insolvency, N.Y. Times, July 18, 2013, at A1 (listing Detroit’s “shrunken tax base but still a huge, 139-square-mile city to maintain” as one factor contributing to the city’s financial woes). (3-4)

This kind of judicial history does not seem to speak to the legal issue at hand and may negatively impact its reception on appeal. Furthermore, all Fair Housing Act cases will be impacted by the Supreme Court’s decision in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. for which it has recently granted cert. In that case, the Supreme Court will decide whether disparate impact is a cognizable claim under the Fair Housing Act.

But, whatever happens in the future, Adkins proceeds apace for now.