A federal Appeals Court gave the $197 billion Navy Federal Credit Union a win and a loss over a class action lawsuit alleging systematic discrimination against racial minorities who were denied mortgages.
On Monday, the U.S. Court of Appeals for the Fourth Circuit in Richmond, Va., ruled that a lower district court acted within its discretion when it denied class certification and struck the corresponding allegations from the complaint. However, the Appeals Court also concluded that the lower district court acted prematurely – and thus exceeded its discretion – in denying class certification before ordering discovery.
This case will be sent back to the lower district court to conduct discovery, a formal pre-trial process in which parties exchange information, documents and evidence relevant to the claims and defenses over whether a Navy Federal algorithm used to evaluate loan applicants "generates a uniquely discriminatory result."
The class action lawsuit was originally filed in December 2023. Nine Navy Federal members, eight who are Black and one who is Latino, applied for different mortgage products. They claimed their loans were not approved because of Navy Federal's alleged discrimination against racial minorities, which the credit union has repeatedly denied.
The Appeals Court upheld the lower district court's decision to deny a class certification because members' borrowing situations differed and their claims lacked sufficient commonality to support a class action lawsuit.
Nevertheless, the Appeals Court also ruled that the lawsuit's class certification could be decided based on whether a Navy Federal algorithm allegedly produces a disparate impact – a disproportionate adverse effect based on race – as alleged in the complaint.
According to the members' complaint, Navy Federal runs data from each member's application through its proprietary underwriting algorithm to determine creditworthiness and decide whether to lend and on what terms. The complaint also alleged that this semi-automated underwriting process generates a uniquely discriminatory result.
"These allegations suggest several common questions of law or fact that are capable of class-wide resolution and whose answers will resolve an issue that is central to the validity of each one of the claims in one stroke," the Appeals Court stated. "For example, does Navy Federal use a single algorithm as part of its process for evaluating every loan applicant regardless of an underlying product? If so, does that algorithm – as opposed to some other variables – produce the disparate impacts based on race that is alleged in the complaint?"
The case will now return to the U.S. District Court for the Eastern District of Virginia, which may answer the Appeals Court's questions and reconsider the Navy Federal members' claims.
"The Fourth Circuit recognized that claims of systemic discrimination deserve to be evaluated on a full factual record," Adam Levitt, a founding partner of DiCello Levitt law firm, which represents the Navy Federal members, said "Our clients allege that Navy Federal's mortgage lending practices denied them equal access to homeownership. This decision ensures those claims will be tested through discovery rather than dismissed at the outset."
Daniel S. Volchok, who argued the Appeals Court case on behalf of Navy Federal, was unavailable for comment on Wednesday.
Since the legal dispute began in 2023, Navy Federal has defended its record and commitment to consistent and fair lending policies and practices, saying it serves all 15.1 million members equally and extends credit to qualified minority applicants and borrowers.
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Peter Strozniak can be reached at peter.strozniak@arc-network.com.
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