In Anderson v. Wachovia Mortgage Corporation, the Court of Appeals for the Third Circuit furthered a split between the Circuits by holding that the direct evidence test introduced by Price Waterhouse v. Hopkins, and the burden-shifting framework established by McDonnell Douglas Corp. v. Green, may be used to investigate claims of discriminatory lending under § 1981. The Circuit split furthered by the Third Circuit’s decision in Anderson will require claimants to use different standards when making a prima facie case of lending discrimination under § 1981 depending upon the Circuit in which their claims are brought.

The appellants in Anderson were three African-American couples who purchased adjacent homes in a Dover, Delaware community. The couples brought a case against their lender, Wachovia Mortgage Corporation, after the lender imposed several conditions on the approvals of their respective mortgages; conditions that the appellants claim were imposed solely because they were African-Americans attempting to purchase property in a predominately Caucasian neighborhood.

The appellants contended that they had direct evidence of discrimination and thus did not need to resort to a McDonnell Douglas analysis. The Third Circuit disagreed and found that the appellants’ direct evidence, in the form of statements made by Wachovia employees not directly involved with their loans, did not satisfy the two elements of the Price Waterhouse test. First, the appellants’ evidence was not strong enough to allow the court to infer that a discriminatory attitude was more likely than not a motivating factor in Wachovia’s decision to impose additional conditions on the appellants’ receipt of funds. Second, the appellants failed to show that the statements offered as direct evidence were factors in the decision making processes of the Wachovia employees directly responsible for the issuing of their mortgages and imposing the conditions at issue in the case.

In the absence of direct evidence, the Third Circuit chose to evaluate the appellants’ claims under a modified McDonnell Douglas framework. The original McDonnell Douglas framework as applied in cases of employment discrimination consists of three phases. First, a plaintiff must carry the initial burden of establishing a prima facie case of racial discrimination. Second, once a plaintiff has made a prima facie case, the burden shifts to the defendant to articulate some legitimate, nondiscriminatory reason for the contested action. Finally, the burden shifts back to the plaintiff to refute the defendant’s given reason for the contested action. 

Under the first phase of the McDonnell Douglas framework, in order to establish a prima facie case, a plaintiff must show that (1) he belongs to a racial minority; (2) he applied and was qualified for a job the employer was trying to fill; (3) though qualified, he was rejected; and (4) after the plaintiff’s rejection, the employer continued to seek applicants with complainant’s qualifications. In the context of lending discrimination, the Third Circuit adapted the McDonnell Douglas framework to require a plaintiff to show that (1) he belongs to a protected class; (2) he applied and was qualified for credit that was available from the defendant; (3) his application was denied or its approval was made subject to unreasonable or overly burdensome conditions; and (4) some additional evidence exists that establishes a causal nexus between the harm suffered and the plaintiff’s membership in a protected class, from which a reasonable juror could infer, in light of common experience, that the defendant acted with discriminatory intent.

The Third Circuit found that while the appellants’ met the first two prongs of the modified McDonnell Douglas framework for establishing a prima facie case of discrimination, the evidence they presented to satisfy the third and fourth prongs was less clear. The appellants did not show that the conditions were overly burdensome or that the conditions were imposed as a result of racial animus. The Third Circuit found that even if the appellants had met all four prongs of the first phase of the McDonnell Douglas framework, they failed to offer sufficient evidence to defeat a motion for summary judgment by either (i) discrediting the defendants proffered reasons or (ii) presenting evidence that discrimination was more likely than not the determining factor in Wachovia’s decision to impose additional conditions.

Applying those tests, the Third Circuit held that the couples had not made out a prima facie case of discrimination, and that they had not adequately countered Wachovia’s legitimate reasons for imposing the conditions it did. As a result, the Court upheld the District Court’s grant of summary judgment to Wachovia, and found that the lower court had acted within its discretion in denying the couples’ motion to compel certain discovery and remand their good faith and fair dealing claim to Delaware state court.

The Third Circuit’s holding in Anderson marks a further split from the approach taken by the Seventh Circuit. The Seventh Circuit applies the McDonnell Douglas standard where there is a “basis for comparing the defendant’s treatment of the plaintiff with the defendant’s treatment of other similarly situated persons,” such as in cases of employment discrimination. The Seventh Circuit has ruled that there is no “comparable competitive situation in the usual allegation of credit discrimination” where borrowers are generally not in direct competition with one another for a lender’s resources. The Third Circuit joins courts in the First, Second, Tenth, Eleventh and D.C. Circuits in applying the McDonnell Douglas standard to cases of lending discrimination.

In Anderson, the Third Circuit disagreed with the Seventh Circuit’s approach, and found that the McDonnell Douglas test may be used in § 1981 discrimination cases. The Court noted that abandoning the McDonnell Douglas framework in cases of alleged lending discrimination would be a significant departure from current law, and would overturn litigants’ settled expectations concerning the applicable law in such cases.

Accordingly, the Third Circuit applied its variation of the McDonnell Douglas test to a case of lending discrimination under § 1981. The Third Circuit clarified the modified fourth prong of this framework by noting that while comparative evidence is “often highly probative of discrimination,” it was not essential. Under the Third Circuit’s reading of the McDonnell Douglas framework, a variety of forms of evidence may be used to show § 1981 discrimination, including for example, evidence of a defendant’s past treatment of a plaintiff.

The circuit split furthered by the Anderson decision will subject claimants to different standards for making a prima facie case of lending discrimination depending upon where their claims are brought. The Anderson decision marks an increase in the number of courts choosing to apply the McDonnell Douglas standard in cases of lending discrimination.