In the last few years, there has been an increase in the filing of lending discrimination cases by unsuccessful loan applicants. Some courts have established a very low threshold of proof that the applicant must muster to avoid summary judgment and to force the lender to defend its practices before a jury. Indeed, some cases suggest that an applicant may establish a prima facie case of discrimination by simply introducing post facto testimony of the applicant's expert that the applicant was creditworthy and that the property had adequate value to serve as collateral, even though there is no other evidence of discrimination.
Bucking this trend, the U.S. Court of Appeals for the D.C. Circuit, recently held in Crawford v. Signet Bank, No. 98-7105 (June 25, 1999), that a loan applicant claiming lending discrimination must put on proof, as part of his or her prima facie case, that he or she had a "qualified" appraisal demonstrating adequate value. In turn, where a lender has adopted Fannie Mae guidelines, the appraisal must have been performed no more than four months prior to the loan closing or re-certified if less than a year old. This ruling sets a fairly high bar for a plaintiff to surmount because it suggests that even if a plaintiff obtains a retrospective appraisal in the course of the lawsuit, such an appraisal would be insufficient proof that the plaintiff was qualified at the time of the loan application. Moreover, Crawford is applicable in other contexts where a lender can point to a specific objective equally applied requirement as grounds for the loan denial.
Lending Discrimination Statutes
There are a number of federal and state statutes that prohibit a lender from discriminating against a loan applicant who belongs to a protected category. The Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. ' 1691, et seq., is the statute most obviously directed at lending discrimination. But a number of other statutes, such as the Civil Rights Act of 1866, 42 U.S.C. ' 1981 and the Fair Housing Act, 42 U.S.C. ' 3601, et seq., also prohibit discrimination. Many states have their own anti-discrimination laws that would apply to lenders. Where the plaintiff is an individual, and not a class representative, the cause of action is typically predicated upon discriminatory treatment.1/ As such, the focus is on the intent of the decision-maker. See La Montagne v. American Convenience Prod., Inc., 750 F.2d 1405, 1412 (7th Cir. 1984); Cram v. Lamson & Sessions Co., 49 F.3d 466, 471 (8th Cir. 1995).
Direct and Indirect Evidence of Discrimination
Discriminatory intent can be proved in a number of ways. First of all, a plaintiff can introduce direct evidence of discrimination, such as discriminatory remarks or racial epithets used by the decision-maker. Nonetheless, courts recognize that direct evidence is often hard to come by and have accepted indirect evidence. Under the framework first developed in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), where there is no direct evidence of discrimination, a plaintiff must present circumstantial evidence of intentional discrimination by first presenting a prima facie case of discrimination, which eliminates "the most common nondiscriminatory reasons for the plaintiff's rejection." Texas Dept. of Community Affairs v. Burdine, 450 U.S. 248, 253-54 (1981). A defendant may rebut a plaintiff's prima facie case by showing a justification for the action taken. It then becomes the plaintiff's burden to show that the articulated justification is pretext for discrimination.
McDonnell Douglas sets forth a four-part test for establishing a prima facie case of discrimination in an employment context. Under this test, a complainant can establish a prima facie case by showing:
- that he belongs to a racial minority;
- that he applied and was qualified for a job for which the employer was seeking applicants;
- that, despite his qualifications, he was rejected; and
- that, after his rejection, the position remained open and the employer continued to seek applicants from persons of complainant's qualifications.
411 U.S. at 802. Significantly, none of the foregoing requires any proof of outward discrimination. Yet, a court may infer discriminatory intent if the employer cannot rebut the presumption by setting forth a non-pretextual reason for refusing to hire the plaintiff. As the Supreme Court said in Furnco Construction Corp. v. Waters, 438 U.S. 567 (1978):
A prima facie case under McDonnell Douglas raises an inference of discrimination only because we presume these acts, if otherwise unexplained, are more likely than not based on the consideration of impermissible factors. And we are willing to presume this largely because we know from our experience that more often than not people do not act in a totally arbitrary manner, without any underlying reasons, especially in a business setting. Thus, when all legitimate reasons for rejecting an applicant have been eliminated as possible reasons for the employer's actions, it is more likely than not the employer, who we generally assume acts with some reason, based his decision on an impermissible consideration such as race.
Id. at 577 (citations omitted).
What Constitutes Indirect Evidence of Lending Discrimination
Several courts have adapted the McDonnell Douglas test in the context of lending and real estate sales. See, e.g., Noland v. Commerce Mortgage Corp., 122 F.3d 551, 553 (8th Cir. 1997); Latimore v. Citibank, F.S.B., 979 F. Supp. 662, 665 (N.D. Ill. 1997), aff'd, 151 F.3d 712, 715 (7th Cir. 1998); Thomas v. First Fed. Sav. Bank, 653 F. Supp. 1330, 1338 (N.D. Ind. 1987); Gross v. United States Small Bus. Admin., 669. Supp. 50, 52-53 (N.D.N.Y. 1987); Bell v. Mike Ford Realty Co., 857 F.Supp. 1550, 1556 (S.D. Ala. 1994). Under this variation on McDonnell Douglas, in a case where the plaintiff alleges that his or her loan application was discriminatorily denied, he or she must prove
- that plaintiff is a member of a protected class,
- that plaintiff applied for and was qualified for a loan,
- that the loan was rejected despite plaintiff's qualifications, and
- that the defendants continued to approve loans for applicants with qualifications similar to those of the plaintiff.
The fourth prong of this test is troublesome as formulated above because it may be generally subsumed under the second prong, assuming the lender continues to make loans to qualified applicants and the plaintiff is in fact qualified. Indeed, two decisions from Ohio omit the fourth part of the test entirely. See Steptoe v. Sav. of America, 800 F. Supp. 1542 (N.D. Ohio 1992); Old West End Ass'n v. Buckeye Fed. Sav. & Loan, 675 F. Supp. 1100 (N.D. Ohio 1987). Thus, it is possible to conclude under this body of case law that a plaintiff can establish a prima facie case simply by introducing testimony that the plaintiff was qualified for the loan and was rejected.
Even more troublesome, under other case law, an applicant may be able to get his case to the jury even if the lender counters with evidence of its own showing that the applicant was not qualified. A trial court must allow a jury to decide whether the lender's rebuttal is "pretext," i.e., not the real reason for the loan denial, where there is some evidence upon which a reasonable jury could infer pretext. In turn, a jury may infer pretext where it concludes that the lender made an obvious mistake in refusing to approve the loan. In an employment context, the D.C. Circuit recently ruled that:
In cases involving a comparison of the plaintiff's qualifications and those of the successful candidate, we must assume that a reasonable juror who might disagree with the employer's decision, but would find the question close, would not usually infer discrimination on the basis of a comparison of qualifications alone. In a close case, a reasonable juror would usually assume that the employer is more capable of assessing the significance of small differences in the qualifications of the candidates, or that the employer simply made a judgment call. Cf. Combs v. Plantation Patterns, 106 F.3d 1519, 1543 (11th Cir. 1997). But this does not mean that a reasonable juror would in every case defer to the employer's assessment. If that were so, no job discrimination case could ever go to trial. If a fact finder can conclude that a reasonable employer would have found the plaintiff to be significantly better qualified for the job, but this employer did not, the fact finder can legitimately infer that the employer consciously selected a less-qualified candidate--something that employers do not usually do, unless some other strong consideration, such as discrimination, enters into the picture.
Aka v. Washington Hospital Ctr., 156 F.3d 1284, 1294 (D.C. Cir. 1998) (en banc). Thus, one could easily adapt this case to the lending context and allow a finding of "pretext" based solely on evidence from a plaintiff's "expert" that the plaintiff was "significantly" qualified for the loan.
Due to this sort of problem with the fourth prong of the McDonnell Douglas test, the Seventh Circuit has generally disapproved of a plaintiff's use of McDonnell Douglas where there is simply a battle of experts as to the applicant's qualifications for the loan. The Seventh Circuit concluded that to survive summary judgment, an African-American plaintiff asserting a lending discrimination claim cannot prevail under the McDonnell Douglas framework "when there is no basis for comparing the defendant's treatment of the plaintiff with the defendant's treatment of other similarly situated persons." Latimore v. Citibank, F.S.B., 151 F.3d 712, 714 (7th Cir. 1998). In Latimore, the defendant Citibank had appraised the plaintiff's home at $45,000, insufficient collateral to support the requested $51,000 loan. The Latimore plaintiff brought to Citibank's attention a year-old appraisal for $82,000. Citibank rejected that appraisal "on the ground that the comparable sales on which the $82,000 appraisal had been based weren't really comparable." 151 F.3d at 713. Several months later, the plaintiff applied for a loan from another bank, which appraised her house at $79,000, although for a smaller loan amount than she sought from Citibank. In addition, in opposition to a motion for summary judgment, plaintiff introduced another expert appraisal showing a value of $62,000.
The Seventh Circuit concluded that the foregoing was insufficient to make out a prima facie case under McDonnell Douglas:
No reasonable suspicion of racial discrimination can arise from the mere fact of a discrepancy between an appraisal conducted by another bank and the appraisal made by Citibank's employee. Latimore's proposed prima facie case . . . lacks any comparison between the treatment of blacks and the treatment of whites. At the heart of McDonnell Douglas is the idea that if the black is treated worse than the white in a situation in which there is no obvious reason for the difference in treatment (such as that the black lacks an essential qualification for the promotion), there is something for the employer to explain; and although the competitive situation which invites and facilitates comparison is usually missing from credit discrimination cases, sometimes there will be another basis for comparison. Suppose, for example, that Latimore and Eromital (who is white), apply at roughly the same time for roughly the same-sized loan from the same Citibank office. The two prospective borrowers are equally creditworthy and the collateral they offer to put up is appraised at the same amount. Both applications are forwarded to Ms. Lundberg and she turns down Latimore's application and approves Eromital's. The similarity in the situations of the white and the black would be sufficient to impose on Citibank a duty of explaining why the white was treated better. No effort at making such a comparison was attempted here.
151 F.3d at 715 (emphasis in original). The Seventh Circuit further noted that the wide range in appraisals does not create an inference of discrimination:
Real estate appraisal is not an exact science, moreover, and so the fact that Citibank's appraisal was lower than someone else's does not create an inference of discrimination.
Id.
The Seventh Circuit's approach would thus overrule cases like Steptoe and Old West End Ass'n., which required no more proof than that which the plaintiff in Latimore presented. Whether the Seventh Circuit's view will be adopted by other courts is still an unknown.
Crawford v. Signet Bank
The D.C. Circuit's decision in Crawford v. Signet Bank, No. 98-7105 (June 25, 1999) sidesteps the issue of whether McDonnell Douglas is applicable to cases of lending discrimination, but gives lenders a good blue print for protecting themselves from a jury trial.
In that case, Signet Mortgage contacted the Crawfords and urged them to apply for a mortgage loan to refinance the indebtedness on their home. Subsequently, Signet Mortgage conditionally approved the loan subject to certain conditions, including "[r]eceipt and review of [a] satisfactory subject property appraisal to support a minimum fair market value of $311,000." Ultimately, Signet Mortgage did not make the loan because the appraisal on the home came in too low. The appraisal was performed by an independent appraiser with no affiliation with Signet Mortgage or its parent Signet Bank. The Crawfords argued that it was discriminatory for the appraisers, in valuing the house, to use as comparables the sales of properties in or near the Crawfords' neighborhood, while not using sales of properties located further away in other neighborhoods. The Crawfords also argued that Signet Mortgage was mistaken in relying upon its appraisal, and not deferring to outdated appraisals that the Crawfords tendered, notwithstanding the independent appraiser4s advice that the other two appraisals were flawed.
The D.C. Circuit noted that it need not decide whether the McDonnell Douglas test was applicable because the Crawfords failed to meet the second prong of the test, i.e., that they were "qualified," by supplying evidence of Signet Mortgage's "[r]eceipt and review of [a] satisfactory subject property appraisal to support a minimum fair market value of $311,000." According to the court,
The only appraisal report meeting this value requirement, the one dated August 24, 1993, was not "satisfactory" because, as the Crawfords acknowledged at oral argument, as of April 1994 it was eight months old and it had not been recertified by an appraiser within the previous four months as required by the Federal National Mortgage Association (Fannie Mae). See Fannie Mae Appraisal Guide @ 201 (App. Exhs. 414-15) (providing "the property must have been appraised within the 12 months that precede the date of the note and mortgage" and when appraisal "will be more than four months old on the date of the note and mortgage," appraiser "must inspect the exterior of the property and review current market date" and provide a "certification" that "he or she believes that the property has not declined in value") . . . [The Crawfords agreed at oral argument that if appraisers followed the FannieMae guidelines, they would be "okay," that is nondiscriminatory.] Because there was no evidence before the district court of an appraisal satisfying the loan approval conditions, we conclude the Crawfords failed to show they were qualified for the loan they sought and therefore did not establish a prima facie case of discrimination.
Slip Op. at 6.
The Crawford ruling sets a fairly high bar for a plaintiff to surmount because it suggests that even if a plaintiff obtains a retrospective appraisal in the course of the lawsuit, such an appraisal would be insufficient proof that the plaintiff was qualified at the time of the loan application. The Court's ruling implies that even in situations where the lender may have reason to suspect that the appraisal was in error, the plaintiff must nonetheless obtain at the time of the application his or her own appraisal demonstrating value. This makes sense if the prima facie proof is supposed to establish that the lender knew at the time of the denial of the application that the plaintiff was qualified, therefore leading to a presumption of discriminatory intent.
The Court did not specifically address whether a plaintiff may still be entitled to put on conventional evidence of discrimination, such as outwardly discriminatory remarks. In addition, perhaps if a plaintiff had proof that the lender knew the appraisal at issue was grossly negligent, the Crawford case could be distinguished on this basis. Nonetheless, the Crawford case is of great benefit to lenders who use outside appraisers. Moreover, the rationale of Crawford can apply to other circumstances where a lender has denied a loan based on the borrower's failure to meet objective criteria.2/ For instance, if the lender has a firm rule with respect to certain loan-to-value or debt-to-income ratios that it applies without exception, proof of this practice may also be sufficient to avert a jury trial. On the other hand, if a lender makes exceptions to its practice, the lender will be forced to justify these exceptions on a color-neutral basis.
Check List of Tips
In light of Crawford and Latimore, lenders may wish to evaluate their origination process. A few helpful tips:
- Put in your commitment letter to the loan applicant that approval of the loan subject to certain conditions, including receipt and review of a satisfactory subject property appraisal to support a minimum fair market value of $_____.
- To the extent feasible, use independent outside appraisers.
- Use objective underwriting criteria.
- Do not allow the underwriter to learn the race of the applicant. Where the decision-maker does not know the applicant's race, it will be difficult for the applicant to assert that the underwriter's decision was racially motivated. If the credit information and application are furnished to the underwriter by computer, make sure the screen the underwriter sees does not indicate race. If the underwriter needs to see the loan application itself, have the processor make a copy masking the box designating the race of the borrower.
1. Section 1981, in some significant respects, is narrower in scope than either the Fair Housing Act or ECOA. For instance, ' 1981 prohibits only intentional discrimination (see, e.g., Bray v. Alexandria Women's Health Clinic, 506 U.S. 263, 268-273 (1993), whereas the Fair Housing Act and ECOA prohibit both intentional discrimination (also known as "discriminatory treatment"), as well as practices which, although not intentionally discriminatory, have a discriminatory impact. See Huntington Branch, NAACP v. Town of Huntington, 844 F.2d 926, 935 (2d Cir. 1988); Metropolitan Housing Corp. v. Village of Arlington Heights, 558 F.2d 1283, 1290-91 (7th Cir. 1977).
2. This assumes that these objective criteria pass muster under a discriminatory impact test under ECOA and FHA. Because Crawford was a ' 1981 case which requires discriminatory intent, not simply discriminatory impact, the Court did not have occasion to address this issue.