Tag Archives: Jordan

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.

Why We Need The CFPB

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Judge Illston (N.D. CA.) has preliminarily approved a settlement of a class action in Jordan et al. v. Paul Financial LLC et al., No. 3:07-cv-04496 (June 14, 2013). The class action arises from lender practices during the Subprime Boom of the early 2000s.  The class is composed of

All individuals who within the four-year period preceding the filing of Plaintiffs’ original complaint through the date that notice is mailed to the Class (the “Class Period”), obtained an Option ARM loan from Paul Financial, LLC that either (a) was secured by real property located in the State of California, or (b) was secured by real property located outside the State of California where the loan was approved in or disseminated from California, which loan had the following characteristics: (i) the yearly numerical interest rate listed on page one of the Note is 3.0% or less; (ii) in the section entitled “Interest,” the Promissory Note states that this rate “may” instead of “will” or “shall” change, (e.g., “The interest rate I will pay may change”); (iii) the yearly numerical interest rate listed on page one of the Note was only effective through the due date for the first monthly payment and then adjusted to a rate which is the sum of an “index” and “margin;” and (iv) the Note does not contain any statement that paying the amount listed as the “initial monthly payment(s),” will definitely result in negative amortization or deferred interest. (2)

Of the problems alleged by the lead plaintiffs and given credibility by the judge’s order, the most disturbing is that the lender described a rate that was fixed for only one month as a “yearly” one. It is hard to see how consumers can parse the language of a mortgage note on their own, especially in California where borrowers typically are not represented by counsel in a residential real estate transaction.

Many commentators claim that more disclosure and financial education are all that are necessary to ensure that consumers have access to credit on reasonable terms.  But residential finance transactions are too complex under the best of circumstances. And they  become just plain abusive when lenders describe an interest rate that adjusts after one month as “fixed.”  And they become too predatory when an interest rate that adjusts monthly is described as a “yearly” one.

This case, arising from lender behavior during the Boom, reminds us why we now have the Consumer Financial Protection Bureau, post-Bust.  When pundits inevitably claim that even reasonable consumer protection regulation initiatives are too paternalistic and too restrictive of credit, let’s remind them of this case and the many others like it.