On July 11, 2024, the U.S. Court of Appeals for the 7th Circuit held in Bureau of Consumer Financial Protection v. Townstone Financial, Inc., that the Equal Credit Opportunity Act (“ECOA”) prohibits discriminatory conduct, comments or remarks directed at both actual and prospective applicants for credit. Looking to the text of ECOA, the 7th Circuit held that notwithstanding the fact that § 1691 references unlawful discouragement of applicants only (i.e., not potential or prospective applicants), the Court could derive interpretive guidance from Regulation B, an administrative regulation enacted by the Federal Reserve Board that expressly prohibits discouragement of prospective applicants. This alert discusses the potential impacts and ramifications of the Court’s decision, particularly in light of the U.S. Supreme Court’s recent reversal of the Chevron Doctrine.

What You Need to Know:

• The CFPB is the primary federal agency responsible for regulating the consumer finance industry.
• The CFPB filed a civil complaint against Townstone, a mortgage broker/lender, in 2022 alleging that Townstone’s founder and CEO violated § 1691 of the Equal Credit Opportunity Act (“ECOA”) by making discriminatory comments that would discourage potential African American individuals from applying for credit from Townstone.
• The U.S. District Court for the Northern District of Illinois dismissed the CFPB’s complaint on the grounds that the text of ECOA does not prohibiting discouraging potential credit applicants, and rather, only prohibits discouraging actual applicants.
• The CFPB appealed the District Court’s decision to the 7th Circuit Court of Appeals.

On July 11, 2024, the U.S. Court of Appeals for the 7th Circuit issued its decision in Bureau of Consumer Financial Protection v. Townstone Financial, Inc., reversing a decision from the U.S. District Court for the Northern District of Illinois and finding that the Equal Credit Opportunity Act (“ECOA”) does not limit prohibited discriminatory conduct, comments or remarks to when directed solely at actual applicants for credit. Rather, the 7th Circuit, three-judge panel affirmed the Consumer Financial Protection Bureau’s position that ECOA prohibits such acts when directed at potential applicants as well. Thus, the panel held, the CFPB has the right to proceed with this action against the defendants and attempt to prove at trial that the alleged conduct did discourage applicants from seeking credit from the defendant mortgage loan broker, Townstone. The CFPB brought this redlining suit against Townstone in 2022 claiming that certain remarks from Townstone’s co-founder and chief executive, Barry Sturner, on a podcast/radio program unlawfully discouraged prospective African American applicants from applying for mortgage loans from Townstone. The District Court dismissed the CFPB’s complaint, however, finding that ECOA (15 U.S.C. § 1691(a)) did not address or create prohibitions against discouragement of prospective applicants and only encompassed consumers that had already applied for credit (i.e., “applicants”), and, thus, implicitly concluding that ECOA’s implementing regulation, Regulation B, 12 C.F.R. § 1002.4(b) impermissibly prohibited and gave the CFPB the authority to challenge conduct directed at prospective applications in general. Click here for our more comprehensive summary of the District Court’s decision.

On appeal, the 7th Circuit reversed. In doing so, the 7th Circuit discussed the textual history of ECOA and Regulation B. The Court noted that Congress’s original purpose in enacting ECOA was to ensure “that financial institutions and other firms engaged in the extension of credit make that credit equally available to all creditworthy customers without regard to sex or marital status.” Since its amendment in 1976, ECOA’s prohibitory section has stated:

It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction—

(1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract).

15 U.S.C. § 1691(a). Relatedly, ECOA has defined the term “applicant” as “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.” Id. § 1691a(b). Moreover, Congress—pursuant to its delegation authority derived from Pub. L. No. 93-495, § 703, 88 Stat. at 1522—authorized the Federal Reserve Board (the “Board”) to enact regulations to carry out ECOA’s purpose. One such regulation is Regulation B, which states that:

Discouragement. A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.

12 C.F.R. § 1002.4(b). The issue for the 7th Circuit was whether Regulation B is sufficiently consistent with ECOA such that it constitutes an appropriate implementing regulation authorized by Congress.

Addressing this issue, the 7th Circuit held that Regulation B is sufficiently in line with ECOA and was properly enacted by the Board, thereby accepting the CFPB’s suggested interpretation and rejecting Townstone and the District Court’s interpretation. According to the Court, “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.” Indeed, the 7th Circuit held that the language of other ECOA provisions reinforces the fact that ECOA was intended to prevent discouraging all credit applicants, including potential applicants. ECOA’s civil liability provision, for example, requires any agency with ECOA enforcement authority which believes a creditor “has engaged in a pattern or practice of discouraging … applications for credit in violation of section 1691(a) of this title,”^[1] to refer the matter to the U.S. Attorney General. Further, ECOA’s scope of prohibition prohibits discrimination “with respect to any aspect of a credit transaction.” 15 U.S.C. § 1691(a). Reading these and other ECOA provisions as a whole, the 7th Circuit concluded that because discouraging an applicant violates ECOA, ECOA’s discrimination prohibition applies with equal force to discouragement of both applicants and prospective or potential applicants.

The 7th Circuit’s holding must be juxtaposed against the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, No. 22-451, 603 U.S. ___ (2024) overruling the Chevron Doctrine, a long-standing statutory interpretation principle derived from the Supreme Court’s 1984 decision in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Chevron doctrine sets forth a two-step process for determining whether the language of an administrative regulation may be used to guide a court in interpreting a statute. The first Chevron step is to determine “whether Congress has directly spoken to the precise question at issue.” Cook Cnty. v. Wolf, 962 F.3d 208, 221 (7th Cir. 2020) (citing Chevron, 467 U.S. 837). If the court finds that Congress has spoken to the issue unambiguously, then the court is bound to interpret the statute in that manner, according to its plain language, and without further reference to extraneous resources. If, on the other hand, Congress has not spoken clearly as to the issue, the court can then “consider whether the agency’s interpretation reflects a permissible construction of the statute.” Id.

The District Court here found that the plain language of § 1691(a) of ECOA was sufficiently clear as only applying to actual “applicants” (and not prospective or potential applicants) such that Regulation B could not be used to provide any guidance to the court on the meaning and scope of § 1691(a) worthy of deferential treatment. The District Court therefore rejected the CFPB’s suggested interpretation since—according to the District Court—ECOA, on this issue, needs no interpretation. Acknowledging the fact that the Chevron Doctrine had been rejected by the Supreme Court, the 7th Circuit “approach[ed] this case as presenting a question of statutory interpretation subject to our de novo review.” Conducting its de novo review, and pursuant to non-Chevron statutory interpretation principles, the 7th Circuit held that the CFPB’s interpretation of § 1691(a) was the correct interpretation. Thus, the 7th Circuit panel rejected the District Court’s conclusion that no interpretation was necessary since “applicant” means actual applicant, not some possible applicant under some undefined set of facts.

Separately, the 7th Circuit declined to consider Townstone’s argument that to the extent ECOA does prohibit discouragement of prospective applicants from applying for credit, such a prohibition violates the First Amendment. Because the District Court’s sole reasoning for dismissing the CFPB’s complaint was on straightforward application of the ECOA language and without addressing the First Amendment issue, the 7th Circuit declined to consider this argument and instead allowed the District Court to address that argument on remand.

On the ECOA issue, the 7th Circuit bases its conclusion on primarily one sentence from ECOA, § 15 USC 1691e(g), in which the statute requires the agencies charged with enforcement to refer to the Attorney General instances in which the agency believes a creditor has “engaged in a pattern or practice of discouraging” applications. Based on this, and what the court found to be a broad delegation of authority to the Board (now with the CFPB pursuant to the Dodd-Frank Act), the Court ruled that the prohibition does in fact encompass discouragement of “prospective” applicants. The 7th Circuit did not, however, address what many see as the crux of the statutory interpretation issue. Indeed, the 7th Circuit acknowledges it must consider the rule (together with ECOA at large) as a whole, but does not reference at all the actual language in 15 USC § 1691’s operative prohibition. That operative prohibition applies only to the statutorily defined term “applicant,” which would not include potential or prospective applicants. While the 7th Circuit notes that it “cannot constrain artificially the ECOA to a single provision,” its curious failure to address the operative prohibition in 15 U.S.C. § 1691 appeared to do just that. It is also curious as to why a referral to the Attorney General would be necessary if the CFPB has the authority to bring suit against a party who it believes has engaged in a pattern of discouraging applications. Alternatively, could that section mean discouraging applications by those who want to seek credit, but not those who “may” in the future want to seek credit offered by that party?

The decision also marks another recent litigation victory for the CFPB. Indeed, in Consumer Financial Protection Bureau v. Community Financial Services Association of America, the U.S. Supreme Court recently confirmed that the CFPB’s funding structure complies with the Appropriations Clause of the U.S. Constitution. Had the Court held that the CFPB’s funding mechanism was unconstitutional, many of the CFPB’s recent activities (enforcement or otherwise) could have been rendered null and void. The 7th Circuit’s decision in Townstone now breathes additional life into the CFPB’s enforcement authority and its enforcement agenda. With the term “applicant” now covering both actual and potential/prospective applicants, the CFPB’s ECOA enforcement authority is stronger because—theoretically—any individual could be considered a prospective/potential applicant. This expansive interpretation will likely prompt new CFPB ECOA enforcement investigations as well as individual and class-plaintiff-driven actions. It is therefore imperative that businesses subject to ECOA or otherwise within the CFPB’s purview carefully examine their communications and practices to address anything that could be construed as unlawful discouragement.

Townstone has fourteen days, until July 25, 2024, to file a petition for rehearing before the 7th Circuit (whether a panel or en banc rehearing), or ninety days, until and including October 9, 2024, to petition the U.S. Supreme Court for a writ of certiorari. The Consumer Financial Services team at Saul Ewing LLP will continue to monitor this and other relevant cases affecting the consumer finance industry. In the interim, those with questions or seeking guidance should consult with a Saul Ewing attorney. 

^[1] 15 U.S.C. § 1691e(g).