The Department of Justice recently announced a $21 million settlement with SunTrust Mortgage over allegations that SunTrust’s neutral and non-discriminatory policy of granting loan originators discretionary pricing authority somehow resulted in loans to minority borrowers to be priced higher than loans to White borrowers. DOJ based its case on the disparate impact theory of discrimination; as such, the Department did not allege that SunTrust treated minority borrowers in a disparate or discriminatory manner. Instead, the case follows DOJ’s practice of filing fair lending cases solely on statistical analyses of loan data and without alleging that any person treated a borrower differently because of race or ethnicity.
The Complaint’s Allegations
The case arose out of mortgage lending during the real estate boom years. DOJ recognized that the policies underlying the case are no longer in effect and labeled SunTrust as a “responsible lender.”
The crux of DOJ’s complaint should sound familiar: that a statistical analysis of SunTrust’s loan data showed that the company’s policy of granting pricing discretion to loan originators resulted in more than 20,000 African-American and Hispanic borrowers paying more than White borrowers. Specifically, the complaint alleged that over a four-year period (2005-2008), SunTrust’s annual net overage disparities ranged between 19 and 26 basis points, while over a five-year period (2005-2009) nationwide annual total broker compensation disparities ranged between 16 and 66 basis points. DOJ said it controlled for “credit-related factors,” but notably did not appear to consider whether the disparities were a function of legitimate non-credit-related factors that cannot generally be included in a statistical analysis, such as market conditions or meeting a competitor’s price in response to borrower negotiation. Even more troubling is that the government’s wholesale lending analysis did not take into account the fact that SunTrust neither set nor received the broker fees, nor did DOJ allege that any broker discriminated against a borrower; in other words, the claim was that SunTrust was responsible for the fees separately charged by brokers to their own customers.
Limitations with the Department’s Position
While the Department’s public comments in announcing the settlement did not betray the legal limitations of the complaint’s allegations, one wonders whether the Supreme Court would disagree that the government presented sufficient evidence to support the claims. For example, through the Supreme Court’s grant of certiorari in Magner v. Gallagher, we know that at least four justices believe the viability of fair lending disparate claims is an issue worthy of the Court’s review. (While the petitioner in that case subsequently had second thoughts and withdrew its appeal, the disparate impact foundation of the Department’s fair lending claims may be shakier than previously thought and subject to future challenge.)
Similarly, even if fair lending disparate impact claims are authorized by statute, the Supreme Court’s landmark ruling in Wal-Mart Stores, Inc. v. Dukes calls into question whether allegations tied solely to statistical analyses of discretionary pricing policies state a valid claim. In particular, the Court in Wal-Mart rejected application of the disparate-impact theory to a company-wide policy of discretion, finding that where hundreds or thousands of persons independently exercise discretion in carrying out their job duties, that is “just the opposite of a uniform … practice” which is normally the subject of a disparate-impact approach. The Court further reasoned that granting employees discretion “is also a very common and presumptively reasonable way of doing business – one that we have said should itself raise no inference of discriminatory conduct.” Department officials have publicly stated that Wal-Mart doesn’t apply to DOJ’s fair lending cases. While this may be true based on a narrow reading of the case’s procedural posture, it belies that the Court’s reasoning in Wal-Mart arguably applies with equal force to cases such as the Department’s action against SunTrust.
The Department’s Mixed Metaphors in Pursuit of Sound Bites
While the complaint is carefully drafted to avoid stating that the Department alleged intentional discrimination, the distinction was lost at times in the Department’s public statements, particularly those that appear geared to being repeated by reporters. For instance, in announcing the settlement, Assistant Attorney General Tom Perez claimed that SunTrust engaged in “discrimination with a smile,” a common quip he’s used in the past and that mixes a metaphor implying intentional misconduct with a case based solely on unintentional discrimination. Perez’s further claim that the case involved a “racial surtax” similarly loses the complexities and limitations of DOJ’s statistics-driven allegations.