Dealers are very concerned about the possibility of being hit with class action lawsuits. There are very good reasons for that concern. A class action suit can pose a huge financial and reputational risk for the dealership, and the defense of the suit can divert valuable management time and effort that could otherwise be used building the business and selling cars. And there’s always the possibility that a court will award damages, in sometimes staggering amounts, against a dealer.

So, when we see a legal development that seems to significantly strengthen the hand of a dealership facing a class claim, we try to spread the word. Such a recent decision arose recently in the housing finance area, but we think you will agree that the court’s decision will be useful in the auto financing arena as well. The case alleged pricing discrimination in the cost of housing credit.

Here’s what happened.

John Rodriguez and several other plaintiffs filed a class action suit against National City Bank and National City Corporation. The plaintiffs alleged that the defendants demonstrated an established pattern and practice of racial discrimination in the financing of residential home purchases.

Specifically, the plaintiffs claimed that the defendants’ discretionary pricing policy resulted in a widespread discriminatory “disparate impact” on minority applicants for home loans. The parties eventually arrived at a proposed settlement on behalf of the class. The plaintiffs moved for final approval of the settlement and certification of the settlement class.

The U.S. District Court for the Eastern District of Pennsylvania denied the motion, finding that the proposed class did not satisfy the “commonality” requirement for certification. A plaintiff seeking class status is required to meet several tests to show the court that “certifying” a class is warranted. One of those tests is to show that the class members have common claims. The lawyers call that the “commonality” test.

In its ruling, the court relied on the Supreme Court’s holding dealing with commonality in a 2011 employment lawsuit involving Wal-Mart Stores, Inc. The court found that the alleged discrimination involved the use of discretion by many loan officers. As such, the plaintiffs would likely have to analyze the disparate impact for each loan officer or, at a minimum, each group of loan officers working for a specific supervisor.

It doesn’t take someone born in a car dealership and raised by F&I professionals to see the way that this housing finance decision translates to auto financing. In typical dealer-financed auto transactions, the pricing of financing for car buyers involves the use of discretion by F&I personnel (the equivalent, for these purposes, of the loan officers referenced by the court). Typically, the F&I folks have the discretion to mark up the finance company’s buy rate in setting the customer’s contract rate of finance charge.

Dealers can argue, as this housing creditor argued, that the court would have to examine the disparate impact for each loan officer, or at a minimum, for each group of them working for a specific supervisor. That sort of separate examination destroys the “commonality” required for class actions to be certified. No commonality, no class.

File this one away. It just might come in handy.

Vol. 9, Issue 2

About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of LLC and a frequent speaker and writer on a variety of consumer credit topics.

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