Oliver v. Navy Fed. Credit Union

MEMORANDUM OPINION

Leonie M. Brinkema, United States District Judge.

This proposed consolidated class action involves allegations that defendant Navy Federal Credit Union (“defendant” or “Navy Federal”) “systematically discriminates against African Americans, Latinos, Native Americans, and other racial minorities by denying mortgage applications that would have been approved for similarly situated [w]hite Americans.” [Dkt. No. 56] (“Consolidated Class Action Complaint,” hereinafter “Complaint” or “Compl.”) at ¶ 1. The Complaint alleges that Navy Federal's mortgage underwriting policies have had a disparate impact on minority loan applicants and that Navy Federal's refusal to correct those discrepancies constitutes intentional discrimination. Based on these allegations, nine plaintiffs-who are proceeding on behalf of themselves and a putative class of others similarly situated-bring claims under federal and state civil rights laws.

Before the Court is Navy Federal's Motion to Dismiss the Consolidated Class Action Complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. [Dkt. No. 69] (“Motion to Dismiss”). Oral argument has been held, and for the reasons that follow, the Court will grant in part and deny in part defendant's Motion to Dismiss and strike the proposed class.

I. BACKGROUND

Plaintiffs Bob Otondi, Dennis Walker, Charles Gardner, Marie Pereda, Laquita Oliver, John Jackson, Carl Carr, Constantina Batchelor, and Christina Hill (collectively, “plaintiffs”) bring this civil action individually and on behalf of other members of a putative class of similarly-situated applicants who applied for original residential purchase mortgages, refinancings, and home equity lines of credit, and were either denied financing or offered financing at less favorable terms than they initially sought.

According to the Complaint, defendant Navy Federal is a member-owned, not-for-profit credit union that provides financial services to members of the military, veterans, and their families. [Dkt. No. 56] (“Compl.”) at ¶¶ 6, 32. It is the largest credit union in the United States, with more than 13 million members, and it has a mortgage lending portfolio valued at over $84 billion. Compl. at ¶¶ 5-6, 65. In 2022, Navy Federal closed nearly 50,000 mortgage loans worth $16.5 billion. Compl. at ¶ 65.

Like all mortgage lenders, Navy Federal is required to submit data to the Consumer Financial Protection Bureau under the Home Mortgage Disclosure Act (“HMDA”). Compl. at ¶ 69. In turn, some of the HMDA data, in an anonymized form, is released annually to the public; other aspects of the data are kept confidential, available only to federal regulators. Compl. at ¶ 78. For example, the published HMDA data accessible to the public does not include applicants' credit scores and precise debt-to-income (“DTI”) ratios. See Home Mortgage Disclosure (Regulation C), 80 Fed.Reg. 66128, 66134 (Oct. 28, 2015).

In support of their claim that Navy Federal discriminates against minority loan applicants, plaintiffs rely on three independent reports analyzing Navy Federal's publicly-available HMDA data. In August 2021, The Markup-an investigative journalism

organization-analyzed the public 2019 HMDA data and identified financial institutions which had significant racial disparities in mortgage lending. Navy Federal was identified as one such lender. Compl. at ¶ 73. The Markup analysis, which controlled for seventeen independent variables in the publicly-available HMDA data, found that Navy Federal was more than twice as likely to deny Black applicants who applied for mortgages as compared to similarly situated white applicants. Compl. at ¶ 73.

In November 2022, the National Credit Union Administration (“NCUA”)-a credit union regulator-published research using publicly-available 2020 and 2021 HMDA data to assess racial and ethnic disparities in mortgage lending by credit unions. Compl. at ¶ 70. That research “controlled] for credit risk characteristics,” and found that-even after taking credit scores into consideration-credit unions denied mortgages to minority applicants at rates up to 1.9 times higher than similarly qualified white applicants. Compl. at ¶ 71.

On December 14, 2023, CNN released a statistical analysis of Navy Federal's publicly-available 2022 HMDA data. Compl. at ¶¶ 2-4, 74-81. Controlling for more than a dozen variables, Black applicants were found to be more than twice as likely to be denied a loan by Navy Federal compared to equally qualified white applicants. Compl. at ¶¶ 4, 74. Equally qualified Latino applicants were approximately 85% more likely to be denied than similarly situated white applicants. Compl. at ¶¶ 4, 74. Navy Federal offered loans to only 48% of Black applicants, and only 56% of Latino applicants, but approved 77% of white applicants. Compl. at ¶¶ 2, 76. In 2022, Navy Federal was more likely to issue a mortgage to a white applicant earning

less than $62,000 per year than a Black applicant making more than $140,000 per year. Compl. at ¶¶3, 77.^[1]

With these statistical analyses in the public domain, the Complaint alleges that Navy Federal has engaged in racial discrimination by denying plaintiffs' loan applications or offering plaintiffs a loan product on less favorable terms. The following tables, which were compiled by defendant in its Motion to Dismiss, accurately summarize the Complaint's allegations regarding plaintiffs' applications:

Bob Otondi	Dennis Walker	Constantina Batchelor	John Jackson	Laquita Oliver
Race	African American	African American	African American	African American	African American
Loan Product	First mortgage	VA cash-out refinance	First mortgage	First mortgage	First Mortgage
Income	$100,000	“exceeding $100,000”	“more than $140,000”	Not alleged	“over $95,000”
Credit Score	“above 700”	“above 620”	“above 700”	“above 700”	“above 650”
Debt	“minimal”	Not alleged	Not alleged	“minimal”	Not alleged

Charles Gardner	Carl Carr	Marie Pereda	Christina Hill
Race	African American	African American	African American	Hispanic / Latina
Loan Product	First mortgage	VA first mortgage	First mortgage; refinance	First mortgage
Income	$92,000	More than $130,000 with spouse	“several hundred thousand dollars per year”	$80,000
Credit Score	“approximately 800”	“above 620”	“above 650”	Not alleged
Debt	Not alleged	“minimal outstanding debt obligations consisting of minimal credit card debt and a car loan”	“minimal debt, aside from existing mortgage loan”	“minimal debt obligations,” including car Ioan and $10,000 in credit card debt

As these tables show, each named plaintiff applied to Navy Federal for at least one home loan product, although different plaintiffs applied for different products. For example, some plaintiffs applied for a first-lien mortgage, while others applied for a Veterans Administration backed loan, and yet others applied to refinance an existing loan. All but plaintiff Batchelor allege that their loan applications were denied; Batchelor alleges she was approved at a higher interest rate. The Complaint does not allege the amount of the mortgage sought or the value of the home for which the plaintiffs sought the mortgage (the “loan-to-value ratio” or “LTV”). Plaintiff Otondi provides the available down payment, “more than 20 percent of the sales price of the home,” Compl. at ¶ 112, and plaintiff Batchelor alleges the interest rate she sought and the rate ultimately offered. Plaintiff Jackson does not provide his income, and plaintiff Hill does not provide any indication of her credit score. Lastly, six plaintiffs allege they received loans at higher interest rates from other lenders following Navy Federal's denials, and no plaintiff provides the reasons given by Navy Federal as the basis for the denial.

Plaintiff Oliver initiated this civil action in December 2023, and two additional class complaints followed. [Dkt. Nos. 1, 33, & 43]. Plaintiffs then filed the instant Complaint on February 20,2024, which consolidated the three actions, removed five original plaintiffs, and added eight new ones. [Dkt. No. 56]. The Complaint alleges in seven counts that plaintiffs have been the victims of disparate treatment and disparate impact under both federal and state civil rights laws. Specifically, plaintiffs invoke the Fair Housing Act, 42 U.S.C. §§ 3601, et seq. (“FHA”) (Count I), the Equal Credit Opportunity Act, 15 U.S.C. §§ 1691, et seq. (“ECOA”) (Count II), and Section 1981 of the Civil Rights Act of 1866, 42 U.S.C. § 1981 (Count III), and seek a declaratory judgment under 28 U.S.C. § 2201 (Count IV). Compl. at ¶¶ 241,255-287. Additionally, plaintiffs Pereda and Hill, who live in California, have brought claims under

California's Unruh Civil Rights Act, Cal. Civ. Code § 51 (“Unruh Act”) (Count V), and California's Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 (“UCL”) (Count VI), on behalf of themselves and a putative California subclass. Compl. at ¶¶ 288-305. Plaintiffs Walker, Jackson, Oliver, and Gardner, who reside in Florida, have brought claims for disparate impact and intentional discrimination under Florida statute Section 725.07 (“Section 725.07”) on behalf of...