As discussed here, on February 3, 2023, an Illinois federal court dismissed a case brought by the Consumer Financial Protection Bureau (CFPB or Bureau) in 2020 against Townstone Financial, Inc., a Chicago mortgage lender, for alleged violations of the Equal Credit Opportunity Act (ECOA). The CFPB had accused Townstone of discouraging prospective African American applicants in the Chicago metropolitan area from applying for mortgages.
Townstone moved to dismiss arguing that the ECOA only prohibits discrimination against “applicants.” The district court agreed finding that “the word ‘applicant’ is used twenty-six times in the statute, and the statute does not prohibit or discuss conduct prior to the filing of an application.”
Last week, the Seventh Circuit Court of Appeals reversed the district court’s decision. The appellate court held that the ECOA does indeed authorize the imposition of liability for the discouragement of prospective applicants. Judge Ripple, writing for the court, stated, “When the text of the ECOA is read as a whole, it is clear that Congress authorized the imposition of liability for the discouragement of prospective applicants.”
Specifically, the court emphasized that the ECOA’s purpose is to ensure equal access to credit without discrimination. The court noted that Congress vested the Federal Reserve Board (and later the CFPB) with broad regulatory authority to prevent “circumvention or evasion” of the ECOA’s purposes. Additionally, other sections like the civil liability provision requires the regulatory agencies responsible for enforcing the ECOA 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.” Thus, according to the court, Congress confirmed that discouraging an application for credit is a violation of the ECOA.
The court also found that Regulation B, which prohibits creditors from discouraging prospective applicants, is consistent with the ECOA’s text and purpose. “Regulation B’s prohibition on discouraging prospective applicants is therefore consistent with the ECOA’s text and purpose,” Judge Ripple wrote. The court did not address Townstone’s argument that Regulation B violates the First Amendment, as the district court had not ruled on this issue. The appellate court left this matter for the district court to address on remand.
In a public statement, Townstone’s legal counsel has indicated that the mortgage lender is considering next steps, but that “Townstone’s defense of CFPB’s regulatory overreach is far from over.” Since neither the district court nor the Seventh Circuit has addressed Townstone’s First Amendment challenge, the final outcome of this litigation remains unknown.
Our Take:
The Seventh Circuit’s decision marks a pivotal shift in the interpretation of the ECOA. By affirming that the ECOA’s protections extend to prospective applicants, the court has broadened the scope of the statute to encompass pre-application conduct. The decision also affirms that the CFPB has broad authority under the ECOA to prohibit lenders from discriminating against both credit applicants and discouraging prospective applicants for credit.
This victory for the CFPB will likely embolden the Bureau to use its ECOA authority expansively in supervision, examinations and enforcement actions, and particularly in bringing redlining cases. Redlining investigations and enforcement actions have been a signature issue for the Biden administration and federal agencies under the “Combatting Redlining Initiative” that was announced in October 2021. To date, the U.S. Department of Justice, CFPB, and other federal agencies have entered into 11 consent orders with financial institutions to resolve redlining allegations. We expect this aggressive approach to enforcement of the fair lending laws to address alleged redlining practices to continue throughout 2024 and perhaps beyond, depending on the outcome of the presidential election.
