In a major win for the CFPB, in CFPB v. Townstone Financial, a panel of the U.S. Court of Appeals for the Seventh Circuit (7^th Circuit) recently held that the Regulation B provision prohibiting discrimination under the Equal Credit Opportunity Act (ECOA) against prospective applicants is consistent with the statute. In so holding, the 7^th Circuit reversed the decision of the district court, which had granted Townstone’s motion to dismiss the CFPB’s complaint on the grounds that the ECOA applies to applicants and not to prospective applicants. While the ECOA refers only to applicants, Regulation B includes prospective applicants and, in particular, prohibits acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit.

Background

After the ruling of the district court, the CFPB appealed to the 7^th Circuit. In its brief, the CFPB argued that the court should apply the Chevron framework and defer to its interpretation of the ECOA in Regulation B that the statute applies to not only applicants, but also prospective applicants, even though the ECOA only refers to applicants. At the time, under the Chevron framework, named after the U.S. Supreme Court’s 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., a court would typically use a two-step analysis to determine if it must defer to an agency’s interpretation. In step one, the court would look at whether the statute directly addresses the precise question before the court. If the statute adopted by Congress was clear on the issue before the court, the court had to follow the Congressional intent. However, if the statute was ambiguous on, or simply did not address, the issue before the court, the court would proceed to step two. In step two, the court had to defer to the agency’s interpretation as long as it was reasonable, even though the court would have reached a different interpretation. The CFPB’s reliance on Chevron was interesting, given that at time the U.S. Supreme Court had agreed to hear the case Loper Bright Enterprises, et al. v. Raimondo, in which the petitioners directly challenged the continued viability of the Chevron framework.

The Supreme Court later agreed to hear a second case, Relentless Inc. v. Department of Commerce, based on the same law at the center of the Loper Bright case, with the petitioners also challenging the Chevron framework. As previously reported, in June 2024 the Supreme Court overturned the Chevron framework, eliminating the deference concept under the framework, but leaving intact the deference framework under the Court’s ruling in the 1944 case Skidmore v. Swift & Co., under which the deference an agency receives depends on how persuasive its interpretation is. In making that assessment, a court looks at the thoroughness of the agency’s investigation of the issues, the validity of its reasoning, the consistency of its interpretation over time, and “other persuasive powers” of the agency. The Loper Bright ruling represents a sea change in how courts will assess federal agency rulemaking. On August 6, 2024, we will hold a 90 minute webinar roundtable featuring three administrative law professors who are among the country’s leading experts on the Chevron framework. To register, click here.

In its response to the CFPB’s brief, Townstone focused on the fact that the ECOA refers only to applicants and not prospective applicants. Among other points, Townstone argued that:

• Under step one of the Chevron framework, the ECOA unambiguously bars discrimination only against “applicants” with respect to any aspect of a “credit transaction.” The ECOA definition of “applicant” is limited to an identifiable person who requests credit from a creditor. Adding “prospective” to “applicant,” as the CFPB does in its anti-discouragement rule, obliterates this limitation.
• While the ECOA does not define “discrimination,” Regulation B defines “discriminate against an applicant” as “treat[ing] an applicant less favorably than other applicants.” Thus, to discriminate on a prohibited basis, a creditor must treat an applicant differently than other applicants because of the applicant’s race or other protected characteristics. “Discourage” is a far broader term that is much less susceptible to an objective definition than “discrimination.” Discrimination under section 1691(a) turns on the actions of the creditor and is fact-based and objective. Discouragement, under the rule, turns entirely on the listener’s subjective reaction.
• Congress did not authorize the anti-discouragement rule by amending the ECOA in 1991 to add a referral provision that states specified agencies shall “refer [a] matter to the Attorney General whenever the agency has reason to believe that 1 or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit in violation of section 1691(a) of this title.” This provision should be read to require referrals to the Attorney General only when an agency believes that creditors are engaging in a pattern or practice of turning away individuals who are requesting credit because of their race or other prohibited basis.
• Extending the ECOA to prohibit the discouragement of prospective applicants is not a permissible interpretation of the statute because it fundamentally changes the ECOA’s core liability provision, section 1691(a), under which a creditor is liable only by taking a specific action—discrimination—against a known individual—an applicant—with whom the creditor knows it is dealing in a credit transaction. The anti-discouragement rule changes this dynamic entirely by imposing liability on creditors simply for making public statements that, based on the listener’s subjective reaction, would discourage them from seeking credit from anyone.

As we previously reported, amicus briefs were filed supporting both the position of Townstone and the position of the CFPB. Oral arguments before a three judge panel of the 7^th Circuit occurred in December 2023.

During the oral argument, the CFPB attorney focused on the ECOA delegation of authority provision, which provides:

“The Bureau shall prescribe regulations to carry out the purposes of this subchapter. These regulations may contain but are not limited to such classifications, differentiation, or other provision, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Bureau are necessary or proper to effectuate the purposes of this subchapter, to prevent circumvention or evasion thereof, or to facilitate or substantiate compliance therewith.”

The attorney argued that through this provision Congress empowered the CFPB to address any loophole in the ECOA. Chief Judge Sykes disagreed that the provision conveyed broad authority on the CFPB regarding the scope of ECOA, noting that the prevention of circumvention or evasion language is tethered to language that precedes it. Chief Judge Sykes appeared to believe the provision gave the CFPB the power to make adjustments and exceptions to a class of transactions to prevent the circumvention or evasion of the statutory non-discrimination provision, but did not give the CFPB the power to expand the statutory non-discrimination provision.

Judge Rovner asked the attorney for Townstone that if the anti-discouragement provision in Regulation B is held to apply to only applicants, wouldn’t that permit lenders to place “Whites Only” signs at the entrance to their offices. The attorney responded that such conduct would be prohibited by the Fair Housing Act and the Illinois Human Rights Act, and considered the CFPB assertion to be a fanciful hypothetical. Judge Rovner nonetheless raised a concern of the result in a non-mortgage credit situation, in which the Fair Housing Act does not apply. The attorney for Townstone countered that if there is a loophole in the ECOA regarding prospective applicants, then it is for Congress to fix the loophole.

Judge Ripple did not ask any questions during the oral argument, which complicated the assessment of how the Seventh Circuit would rule.

The Ruling

The decision of the 7^th Circuit three judge panel was unanimous, and written by Judge Rovner. The opinion only addresses the overruling of the Chevron framework in a footnote, noting that “[w]e approach this case as presenting a question of statutory interpretation subject to our de novo review.”

The opinion provides that “[a]n analysis of the text of the ECOA as a whole makes clear that the text prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit.” Supporting this position, the court points to the ECOA provision that grants the CFPB “with the authority to issue regulations “necessary or proper to effectuate the purposes of this title” or “to prevent circumvention or evasion thereof.”“

The court then makes the following points in support of its ruling:

• “In endowing the Board with authority to prevent “circumvention or evasion,” Congress indicated that the ECOA must be construed broadly to effectuate its purpose of ending discrimination in credit applications.”
• “When Congress amended its civil liability provision so that the regulatory agencies responsible for enforcing the ECOA would be required to refer a case to the Attorney General whenever the agency believed a creditor “has engaged in a pattern or practice of discouraging … applications for credit in violation of section 1691(a) of this title,” 15 U.S.C. § 1691e(g), Congress thus confirmed that discouraging an application for credit is a violation of the ECOA.”
• “Reading the statutory language as a whole, including the strong congressional direction that the cognizant agencies and the Department of Justice prevent “circumvention and evasion,” makes clear that the prohibition against discouragement must include the discouragement of prospective applicants. The term “applicant” cannot be read in a crabbed fashion that frustrates the obvious statutorily articulated purpose of the statute.”
• “Indeed, the ECOA’s scope of prohibition prohibits discrimination “with respect to any aspect of a credit transaction.” 15 U.S.C. § 1691(a) (emphasis added). Congress well understood that “any aspect of a credit transaction” had to include actions taken by a creditor before an applicant ultimately submits his or her credit application.”

The court remanded the case to the district court. In so doing the court made clear that it did not “express an opinion on the underlying merits of the CFPB’s claim.” It left such analysis to the district court.

Our Take

Respectfully, we disagree with the court’s decision. The ECOA defines “applicant” as follows: “The term “applicant” means any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” 15 U.S.C. § 1691a(b). Regulation B sets forth the following definition: “Applicant means any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit.” 1002.2(e). The express inclusion of any person who requests credit in the Regulation B definition appears to be a fair interpretation of the ECOA definition of “applicant.” A person who is requesting credit would appear to be an applicant for credit.

At the time the ECOA was enacted in 1974 there apparently was a disturbing practice at some consumer financial services providers that did not want to extend credit to a protected class member because of their protected class status. When the member visited an office of a consumer financial services provider to request credit, apparently in various cases the representative would say something to the effect that they were going to be denied, so it was best that they not proceed with an application to avoid the embarrassment of being denied. That is discouraging an applicant in a discriminatory manner—the individual was at the office of the consumer financial services provider to request credit, and they were discouraged from doing so because of their protected class status, which is a prohibited basis of discrimination. Apparently a continued concern regarding the discouraging of applicants led Congress to amend ECOA in 1991 to require specified agencies to refer a case to the Attorney General whenever the agency believed a creditor “has engaged in a pattern or practice of discouraging … applications for credit,”

The discouragement language in the ECOA must be read in the context of the underlying concern. Congress wanted to prohibit creditors, because of a prohibited basis, from discouraging parties who were requesting credit from proceeding with an application. The goal of Congress can be interpreted by limiting the application of the ECOA to applicants, which appear to include persons requesting credit. There is no need to expand the ECOA beyond its intended scope by determining that it applies to prospective applicants to reach such conduct.

As the court observed, the ECOA authorizes the CFPB to adopt regulations that “are necessary or proper to effectuate the purposes of this subchapter, to prevent circumvention or evasion thereof . . . .” However, that provision does not grant the CFPB authority to stretch the reach of the ECOA beyond its statutory bounds, and its statutory bounds limit its reach to applicants. An important factor here is if the ECOA applies to prospective applicants, exactly who is a prospective applicant? Additionally, exactly what conduct rises to the level of discouraging this undefined prospective applicant from seeking credit? The answers are not found in the ECOA, in the court’s opinion or in Regulation B. When a court seeks to interpret a statute that will result in concepts that are not defined by the statute they are interpreting, and places regulated entities in unchartered waters, perhaps the court should consider that Congress never intended to set sail into those waters.

A significant factor that the court did not focus on, even though argued by Townstone in its brief and in oral arguments, is the very different language of a sister statute, the Fair Housing Act. As noted by Townstone, section 3604 of the Fair Housing provides:

“As made applicable by section 3603 of this title and except as exempted by sections 3603(b) and 3607 of this title, it shall be unlawful—

. . .

(c)To make, print, or publish, or cause to be made, printed, or published any notice, statement, or advertisement, with respect to the sale or rental of a dwelling that indicates any preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin, or an intention to make any such preference, limitation, or discrimination.”

Thus, when Congress seeks to prohibit discriminatory advertising or statements, it knows how to do so.

Additionally, section 3605 of the Fair Housing Act provides as follows:

“(a)In general
It shall be unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.

(b)”Residential real estate-related transaction” defined
As used in this section, the term “residential real estate-related transaction” means any of the following:
(1)The making or purchasing of loans or providing other financial assistance—
(A)for purchasing, constructing, improving, repairing, or maintaining a dwelling; or
(B)secured by residential real estate.
(2)The selling, brokering, or appraising of residential real property.” (Emphasis added.)

This language is very different from the language in ECOA, as it prohibits discriminating against any person “in making available” a residential mortgage loan or other covered service. This also demonstrates that when Congress seeks to reach pre-application activity, it knows how to do so.

The fact that Congress used very different language in the ECOA that focuses on applicants means that Congress intended the ECOA solely to apply to applicants, and not to pre-application activity.

We are sensitive to the issue that interpreting the ECOA solely to apply to applicants could allow inappropriate behavior in the pre-application stage, particularly for credit not also covered by the Fair Housing Act, which does reach pre-application activity. However, as noted by Townstone, if there is a gap in the coverage of the ECOA with regard to pre-application activity, that is a policy matter that is the purview of Congress, and not the purview of a federal agency or federal court to address by expanding the statute beyond the boundaries set by Congress.

What Happens Next

Townstone now must choose its path forward. It could accept the court’s opinion and turn its attention to addressing the merits of the CFPB’s claim in the district court. We understand that Townstone believes it has evidence that can refute the CFPB’s claims regarding the discouragement of prospective applicants. Townstone could opt to seek an en banc rehearing before the entire 7^th Circuit. The 7^th Circuit has discretion in whether to grant such a request, and such requests often are not granted. Townstone also could seek review at the Supreme Court, which also has discretion regarding whether it would accept the case.

If Townstone seeks Supreme Court review, and the Supreme Court accepts the case, that likely would be a bad omen for the CFPB. As noted above, based on the Court’s decision in Loper Bright, the CFPB will not receive Chevron deference, and would have to argue for Skidmore deference. The CFPB may experience a strong headwind in trying to persuade the conservative majority of the Court that it should interpret the ECOA to apply to prospective applicants.

The opinion of the 7^th Circuit panel is dated July 11, 2024. Townstone has 45 days from then to request a rehearing en banc before the entire 7^th Circuit, and 60 days from then to request Supreme Court review of the panel’s decision.

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