On July 11, 2024, the U.S. Court of Appeals for the Seventh Circuit held in Consumer Financial Protection Bureau v. Townstone Financial, Inc. that the Equal Credit Opportunity Act (“ECOA”) protects prospective applicants and prohibits creditors from discouraging prospective applicants on the basis of sex, marital status, race, color, religion, national origin, or age. Lenders and other financial institutions should take note of Townstone, as it expands the ECOA to apply even before a credit transaction begins.
In July 2020, the CFPB sued the Chicago-based mortgage lender Townstone Financial Inc. and its co-founder and CEO, Barry Sturner. Townstone advertised by broadcasting a radio show and podcast, co-hosted by Sturner, which featured discussions of mortgage-related issues. The CFPB alleged that, during the radio show, Sturner and his co-hosts regularly made statements that would discourage black prospective applicants from applying for mortgage loans from Townstone. These statements included derogatory remarks about Chicago neighborhoods with majority black populations. The CFPB provided statistical data showing that, as compared to its peer institutions, Townstone had fewer mortgage applications from black applicants and fewer mortgage applications for properties in neighborhoods with majority black populations.
The district court granted Townstone’s and Sturner’s motion to dismiss, holding that ECOA does not apply to prospective applicants. The district court relied on ECOA’s definition of applicant: “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 establish credit limit.” 15 U.S.C. § 1691a(b). It found that a prospective applicant did not fit the statutory definition of applicant, and thus ECOA did not provide a basis for a prospective applicant’s claim. The CFPB appealed.
On July 11, 2024, the Seventh Circuit reversed, finding that ECOA does protect prospective applicants. Rather than focus on the plain meaning of “applicant,” the appeals court focused on the history of ECOA to determine that Congress intended for the statute to prevent creditors from discouraging applications on a prohibited basis. First, the panel observed that Congress vested the Federal Reserve Board (which preceded the CFPB as ECOA’s chief regulatory body) with broad authority to enact regulations to carry out ECOA’s purpose and to prevent the “circumvention or evasion” of ECOA. Congress later modified ECOA by requiring its enforcing agencies refer to the Department of Justice all matters in which creditors may have “engaged in a pattern or practice of discouraging or denying applications.” 15 U.S.C. § 1691e(g). These allusions to regulatory authority, the appeals court found, demonstrated that Congress believed discouraging a credit application (on a prohibited basis) violated ECOA.
In so finding, the Seventh Circuit rejected the district court’s reliance on the definition of “applicant” as reading ECOA in a “crabbed fashion” that frustrates the statute’s purpose. The court also found that Regulation B’s prohibition on “discouraging prospective applicants is therefore consistent with the ECOA’s text and purpose.” The Seventh Circuit did not attempt to define the population of “prospective applicants” in any meaningful way, leaving room for plaintiffs’ attorneys and regulators to argue that this group is effectively limitless.
Although the Seventh Circuit’s decision acknowledged that the Supreme Court recently overruled Chevron in Loper Bright Enterprises v. Raimondo, the opinion otherwise sidestepped Loper. Notwithstanding its minimal reliance on the statute’s plain text, the panel reasoned that the case “present[ed] a question of statutory interpretation subject to de novo review.”
In short, Townstone broadens ECOA’s applicability to include pre-application activity. The decision represents a significant shift in ECOA’s scope, at least in the Seventh Circuit, and departs from other appellate decisions that have focused on the plain meaning of “applicant.” The decision will also likely encourage regulators to expand their investigation and enforcement efforts in the fair lending space. Thus, lenders will need to assess whether their marketing and public-facing communications could reasonably be interpreted as discouraging applications on a prohibited basis.
