African-American borrowers who claimed a lender’s policies caused them to pay more than whites in securing home mortgage loans could not rely on a nationwide statistical analysis in order to gain certification as a class, a U.S. District Court judge has ruled.

The study showed that, on average, black borrowers spent $134 more on their mortgages each year than similarly situated whites. The purported disparity allegedly resulted from the lender’s policy of giving brokers discretion to set higher rates for borrowers based on factors other than creditworthiness.

Judge Rya W. Zobel had previously certified the plaintiff borrowers as a class that included all African-Americans who had obtained a home loan from the defendant, Option One Mortgage Corp., during a particular time period.

But relying on the U.S. Supreme Court’s 2011 ruling in Wal-Mart Stores, Inc. v. Dukes, which had been decided in the interim, Zobel reversed her prior decision.

“Plaintiffs’ statistical analysis shows that on average, nationwide, African-American borrowers pay more for their loans than white borrowers. But that is no longer sufficient to establish commonality” of questions of law or fact as required for certification under Rule 23(a)(2) of the Federal Rules of Civil Procedure, Zobel wrote, decertifying the class.

Instead, she said, “under Wal-Mart, plaintiffs can only show a common question if they can show a common disparate impact at the level of each individual broker, thereby raising the inference that the brokers shared a common mode of exercising their discretion.”

The 10-page decision is Barrett, et al. v. Option One Mortgage Corporation, et al.

Class barriers

Noting his disappointment in Zobel’s decision, plaintiffs’ counsel Gary Klein of Klein, Kavanagh, Costello in Boston said the Wal-Mart ruling is making it difficult for civil rights plaintiffs “to proceed by way of class action.”

At the same time, Klein said, “it’s less clear that Wal-Mart will be applied outside the civil rights context. Much of the rationale behind Wal-Mart is only relevant to discretionary decision-making processes.”

The Wal-Mart case involved a purported class of female employees of the retail chain alleging that the company’s policy of granting local managers discretion over pay and promotion disparately impacted women in violation of Title VII.

Stuart T. Rossman of the National Consumer Law Center in Boston, who also represented the plaintiffs, agreed that Barrett shows Wal-Mart has raised the bar in terms of class certification issues.

“It’s certainly made the challenge of proving commonality under Rule 23 if not more difficult, than certainly more specific,” he said.

Rossman added that it is important to remember that the Wal-Mart decision has not prohibited class actions; it has simply provided that to prove commonality in disparate impact cases, plaintiffs must be able to demonstrate different elements than previously.

“I’m not sure it was a change in the terms of the standard so much as it was a change in the degree or intensity of the standard,” he said. “How that ruling gets applied to other contexts will be a matter of trial and error.”

However, Brandon F. White of Foley Hoag in Boston, who defends financial institutions in class action cases but was not involved in Barrett, said Zobel’s ruling shows how predictions that Wal-Mart would transform federal class action litigation are proving to be accurate.

“The upshot seems to be that, in the post-Wal-Mart world, the courts have not entirely closed the door to evidence based on statistical analyses of disparate treatment, but it is getting increasingly difficult to see how plaintiffs can squeeze their putative classes through the crack that has been left open,” White said.

The lender’s local counsel, Kathleen M. Guilfoyle of Campbell Trial Lawyers in Boston, could not be reached for comment prior to deadline.

Statistical analysis

The plaintiffs in the case are a number of African-American individuals who obtained home mortgage loans from Option One through mortgage brokers.

According to the plaintiffs, whenever a borrower applied for a new loan, the defendant allegedly calculated a fixed “par rate” based on objective creditworthiness criteria such as the borrower’s credit score and the value of the property to be mortgaged.

But the lender also allegedly maintained a discretionary component under which it authorized its brokers to set interest rates higher than the par rate and to charge loan origination and processing fees. Those rates and fees were apparently left to the discretion of individual brokers, with the lender setting only a maximum markup for the par rate.

The lender also allegedly paid the brokers more for loans that yielded higher rates, which cost consumers more.

In February 2008, the plaintiffs sued the defendant in U.S. District Court alleging violation of the Equal Credit Opportunity Act and the Fair Housing Act. According to the plaintiffs, the policy of granting brokers discretion to set higher rates had an adverse effect on black borrowers because, on average, Option One’s brokers assessed higher discretionary charges against black borrowers than against similarly situated white ones.

The plaintiffs did not allege that the policy amounted to intentional discrimination. Instead they brought their claims under a “disparate impact” theory, alleging practices that were race-neutral on their face but disproportionately harmed a particular group.

On March 21, 2011, Zobel issued an order certifying the plaintiffs as a class, concluding that the plaintiffs had demonstrated commonality. Specifically, the judge found that the class members’ claims shared a legal and factual question: whether Option One’s pricing policy, by giving brokers discretion to set higher rates, resulted in a disparate impact on black borrowers.

In so ruling, Zobel relied on a report from the plaintiffs’ expert, a professor at Yale Law School, who found that, based on a regression analysis comparing the APR paid by white and minority borrowers between 2001 and 2007, black borrowers spent, on average, about $134 more a year than similarly situated whites.

Three months later, the Supreme Court issued the Wal-Mart decision. In light of the ruling, Option One moved to decertify the class.

Insufficient showing

Addressing the lender’s motion, Zobel found that, under Wal-Mart, the plaintiffs’ showing could no longer be sufficient to establish commonality.

“Wal-Mart establishes that a nationwide policy of granting discretion to local units can only raise a common question if the local units have a ‘common mode of exercising discretion,’” the judge said. “Furthermore, Wal-Mart disapproves the use of aggregate, nationwide statistics to prove a common method of exercising discretion at the local level.”

In other words, Zobel explained, the Supreme Court said the Wal-Mart plaintiffs could not show commonality by simply pointing out a disparate impact in the nationwide average. Instead, they would have to show a disparate impact in each store where a member of the plaintiff class worked.

Barrett faces the same problem, Zobel said.

“[The plaintiffs] challenge Option One’s policy of granting its brokers discretion to set higher rates [but] they do not point to any ‘common mode of exercising discretion’ that was shared by all of Option One’s brokers,” she said.

Had the plaintiffs, for example, claimed that Option One brokers uniformly exercised their discretion by considering specific attributes — such as general aptitude test scores or educational achievement — that produced a disparate impact, they would be able to show commonality justifying treatment as a class, Zobel stated.

“But without some such claim, the Supreme Court tells us, ‘demonstrating the invalidity of one [broker’s] use of discretion will do nothing to demonstrate the invalidity of another’s,’” the judge said, adding that other courts in similar cases have ruled in the wake of Wal-Mart that classes like the one in Barrett lack commonality.

Accordingly, Zobel concluded, the class should be decertified.