Miller v. Countrywide Bank, N.A.

• Decision Date: 30 July 2008
• Docket Number: Civil Action No. 07cv11275-NG.
• Citation: 571 F.Supp.2d 251
• Parties: Gillian MILLER, Lakisha Austin, Arthur Davis, and Luella Davis, Plaintiffs, v. COUNTRYWIDE BANK, N.A., Countrywide Home Loans, Inc., Countrywide Correspondent Lending, Full Spectrum Lending, Inc., Summit Mortgage LLC, and Loans for Residential Homes Mortgage Corp., Defendants.
• Court: U.S. District Court — District of Massachusetts

571 F.Supp.2d 251

Gillian MILLER, Lakisha Austin, Arthur Davis, and Luella Davis, Plaintiffs, v. COUNTRYWIDE BANK, N.A., Countrywide Home Loans, Inc., Countrywide Correspondent Lending, Full Spectrum Lending, Inc., Summit Mortgage LLC, and Loans for Residential Homes Mortgage Corp., Defendants.

Civil Action No. 07cv11275-NG.

United States District Court, D. Massachusetts.

July 30, 2008.

COPYRIGHT MATERIAL OMITTED

Gary E. Klein, Shennan Alexandra Kavanagh, Roddy Klein & Ryan, Boston, MA, Matthew E. Van Tine, Miller Law LLC, Chicago, IL, for Plaintiffs.

James W. McGarry, Michelle R. Gonnam, Thomas M. Hefferon, Goodwin Procter, LLP, William A. Worth, Prince, Lobel, Glovsky & Tye LLP, Boston, MA, for Defendants.

MEMORANDUM AND ORDER RE: MOTION TO DISMISS

GERTNER, District Judge.

I. INTRODUCTION

Plaintiffs Gillian Miller, Lakisha Austin, and Arthur and Luella Davis (collectively "plaintiffs"), on behalf of themselves and all other similarly situated African-American borrowers, bring this putative nationwide class action against Countrywide Bank, a division of Treasury Bank, N.A., Countrywide Home Loans, Inc., and its wholly-owned subsidiaries, Countrywide Correspondent Lending ("Countrywide Correspondent"), and Full Spectrum Lending, Inc. ("Full Spectrum") (collectively "Countrywide" or "defendants"). Plaintiffs also assert claims against two retail mortgage lenders, Summit Mortgage, LLC ("Summit"), and Loans for Residential Homes Mortgage Corp. ("LFRHM").

Plaintiffs allege that Countrywide's Discretionary Pricing Policy ("pricing policy") has a widespread discriminatory impact on African-American applicants for home mortgage loans, in violation of the Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. §§ 1691-1691(f), and Fair Housing Act ("FHA"), 42 U.S.C. §§ 3601-3619.¹ That system, plaintiffs allege, makes African-Americans who borrow from Countrywide over three times more likely than white borrowers to receive a high-APR² home loans and two times more likely to receive a high-APR refinancing loan.³ This disparity, plaintiffs contend, is not fully explained by any objective indicia of creditworthiness, such as credit history, credit score, debt-to-income ratio, or loanto-value ratio. Instead, they argue that a significant portion of the disparity is explained by Countrywide's pricing policy, which explicitly allows for subjective price markups at the point of sale—markups above the fees set according to Countrywide's objective, risk-based criteria. These subjective markups, in turn, have a disparate impact on African-American home buyers.

The case is currently before the Court on Defendants' Motion to Dismiss (document #16) under Fed.R.Civ.P. Rule 12(b)(6). For the reasons that follow, defendants' motion is DENIED.

If the facts alleged in the complaint are to be believed—which they must at this point in the litigation—the net effect of Countrywide's pricing policy is a classic case of disparate impact: White homeowners with identical or similar credit scores pay different rates and charges than African-American homeowners, because of a policy that allows racial bias to play a part in the pricing scheme.

II. FACTS

Plaintiffs are all African-American homeowners residing in the greater Boston area who obtained home mortgages through Countrywide, its subsidiaries, or the two named retail mortgage lenders between January 1, 2001, and the date of this action ("Class Period").⁴

Countrywide is one of the largest mortgage lenders in the United States. It makes home loans directly through its various subsidiaries, such as Full Spectrum, as well as through a network of independent mortgage brokers. Countrywide also obtains business through a network of correspondent lenders, such as Summit and LFRHM, that originate loans and then sell them to Countrywide.

According to the complaint, Countrywide's pricing policy works like this: Countrywide obtains customers' credit information through its loan officers, brokers, or correspondent lenders. Based on these objective criteria, Countrywide computes a "par rate." Agents, brokers, or correspondent lenders at the point of sale, however, are allowed to impose additional charges, fees, and rates that are unrelated to objective risk factors. Countrywide communicates not only the applicable par rates, but also the additional authorized discretionary charges to its loan officers, brokers, and correspondent lenders through regularly published "rate sheets."⁵

As a result of these additional discretionary charges, the complaint alleges, African-American borrowers pay disproportionately high interest and fees on their home loans. Additionally, African-American borrowers are more likely than white borrowers to apply for credit from Countrywide through its sub-prime subsidiary, Full Spectrum, or from an authorized broker or correspondent lender, which are on average more expensive than loans obtained directly from Countrywide. To be sure, plaintiffs concede that creditworthiness may explain part—but only part—of the disparity in credit rates. However, the resulting discrepancies between the rates paid by African-American and white borrowers cannot, according to plaintiffs, be explained entirely by any objective criterion.

The individual plaintiffs' allegations track the disparate impact allegations. On January 31, 2006, Plaintiff Miller financed her home in Hyde Park with two loans obtained through Summit. According to the complaint, Countrywide "table-funded" the loans, meaning that the loans were underwritten by Countrywide. The loans were then sold to Countrywide. Plaintiff Austin purchased her home in September 2004 with financing from Full Spectrum. And plaintiffs Arthur and Luella Davis refinanced their home in August 2005 through LFRHM. All of the named plaintiffs allege that they ended up paying more for their loan in fees and increased interest rates than they would have but for Countrywide's discriminatory pricing policy and the application of subjective pricing criteria.⁶

III. DISCUSSION

Countrywide has moved to dismiss plaintiffs' complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. Countrywide also moves to dismiss Plaintiffs Miller and Davis' claims, arguing that they assert disparate treatment claims against third parties (Summit and LFRHM) rather than disparate impact claims against Countrywide or its subsidiaries.

The crux of Countrywide's argument is that plaintiffs have not alleged a sufficiently specific discriminatory policy to support a disparate impact claim under the ECOA or FHA. Defendants draw on Smith v. City of Jackson, 544 U.S. 228, 125 S.Ct. 1536, 161 L.Ed.2d 410 (2005), in which the Supreme Court rejected a disparate impact claim under the Age Discrimination in Employment Act ("ADEA") because the targeted policy lacked sufficient specificity. Underlying defendants' argument is another recent Supreme Court decision, Bell Atlantic Corp. v. Twombly, — U.S.—, 127 S.Ct. 1955, 167 L.Ed.2d 929, (2007), which rejected the lax pleading standard of Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), and held that a complaint must be dismissed if it fails to allege a set of facts sufficient to create a "plausible" entitlement to relief.⁷ Twombly, 127 S.Ct. at 1966.

A. Plaintiffs' Prima Facie Disparate Impact Claim

In order to properly assert a disparate impact claim, plaintiffs must plead 1) a specific and actionable policy, 2) a disparate impact, and 3) facts raising a sufficient inference of causation. See City of Jackson, 544 U.S. at 241, 125 S.Ct. 1536.

1. Specific and Actionable Policy

The "specific and actionable policy" that plaintiffs challenge is Countrywide's discretionary pricing policy, which allows Countrywide's retail salesmen, independent brokers, and correspondent lenders to add various charges and fees based on subjective non-risk factors, and which, in turn, has a racially discriminatory impact on African-American borrowers. Plaintiffs' claim is in the mold of the Supreme Court's decision in Watson v. Fort Worth Bank, 487 U.S. 977, 108 S.Ct. 2777, 101 L.Ed.2d 827 (1988), which held that an employer's deference to the subjective decisionmaking of frontline employees may serve as the basis for a disparate impact claim.⁸ Id. at 990-91, 108 S.Ct. 2777. There, the Court wrote:

If an employer's undisciplined system of subjective decisionmaking has precisely the same effects as a system pervaded by impermissible intentional discrimination, it is difficult to see why Title VII's proscription against discriminatory actions should not apply. In both circumstances, the employer's practices may be said to `adversely affect [an individual's] status as an employee, because of such individual's race, color, religion, sex, or national origin.'

Id. at 990-91, 108 S.Ct. 2777 (quoting 42 U.S.C. § 2000e-2(a)(2)). Watson's focus on subjective decisionmaking has particular resonance in the instant context, where the fundamental question under the ECOA and the FHA is creditworthiness, rather than, say, vague notions of suitability for this or that employment under Title VII. While Countrywide plainly identifies the objective standards that define creditworthiness in the par rate, it enables its agents, brokers, and correspondent lenders to add other charges at their own discretion, untethered from an objective assessment of creditworthiness.

The question before the Court, however, is whether plaintiffs have alleged Countrywide's policy with sufficient specificity. Defendants cite City of Jackson, in which the Supreme Court reiterated the requirement that disparate impact plaintiffs allege the targeted practice with enough specificity to give defendants fair notice as to the actions they must defend:

[I]t is not enough simply to allege that there is a disparate impact . . . or point to a generalized policy that leads to such an impact. Rather, the [plaintiff] is "`responsible for...