On July 11, the Seventh Circuit held that the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq. (ECOA) authorizes the imposition of liability for the discouragement of prospective applicants. See CFPB v. Townstone Financial, Inc., ___ F.4th ___ (7th Cir. 2024), 2024 WL 3370023. As anticipated in Goodwin’s Year in Review and Consumer Finance Insight’s prior coverage, this case reached an important issue regarding the meaning of ECOA. The Seventh Circuit reversed the district court’s decision that the definition of “applicant” in ECOA did not extend to prospective applicants.

In 2020, the Consumer Financial Protection Bureau (CFPB) brought an action against an Illinois-based mortgage lender Townstone Financial, Inc. and its sole owner, alleging that the defendants discouraged Black prospective applicants from applying for mortgage loans from Townstone. In particular, the CFPB alleged that the hosts of Townstone’s podcast, “The Townstone Financial Show,” regularly made statements that would discourage Black prospective applicants from applying for mortgage loans, including negative comments about specific neighborhoods in the Chicago area. In addition, the CFPB alleged that Townstone received fewer mortgage applications from Black applicants than did its peer institutions.

In February 2023, the district court granted Townstone’s motion to dismiss the complaint, agreeing with the defendants’ argument that ECOA did not create liability for the discouragement of prospective applicants.

The Seventh Circuit reversed and remanded, holding that ECOA authorizes the imposition of liability for the discouragement of prospective applicants. It further held that Regulation B, which implements ECOA, is consistent with ECOA insofar as it prohibits the discouragement of prospective applicants. See 12 C.F.R. § 1002.4 (“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”).

In a unanimous opinion authored by Judge Ripple and joined by Chief Judge Sykes and Judge Rovner, the Seventh Circuit interpreted ECOA’s definition of “applicant” which defines the term 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.” 15 U.S.C. § 1691a(b). The Court did not apply Chevron deference, in line with the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, No. 22-451, 603 U.S. ___ (2024).

The Court’s de novo analysis relied heavily on “the text of ECOA as a whole” and “the strong congressional direction that the cognizant agencies and the Department of Justice prevent ‘circumvention and evasion’” of ECOA. The Court pointed to other provisions of ECOA including Section 1691e(g) which requires agencies to refer a case to the Attorney General where a creditor “has engaged in a pattern or practice of discouraging … applications for credit.” The Court also noted that ECOA prohibits discrimination “with respect to any aspect of a credit transaction,” 15 U.S.C. § 1691(a) (emphasis in opinion), which in the Court’s view includes actions taken by a creditor before an applicant submits a credit application. Based on these considerations, the Court concluded that “the prohibition against discouragement must include the discouragement of prospective applicants” and therefore Regulation B is authorized by and consistent with ECOA’s plain text.

The Seventh Circuit did not reach the issue of whether Regulation B violates the First Amendment. The Court remanded to allow the district court to address that argument in the first instance because the district court had not reached that issue in light of its conclusion that ECOA could not apply to prospective applicants. The Court also stressed that it did not express an opinion on the underlying merits of the CFPB’s claim in this case.

This case and decision is notable in several respects. It is the first CFPB suit brought against a nonbank mortgage lender. It is also on the forefront of opinions implementing Loper Bright, although in this case there is no indication that Loper Bright changed the conclusion or analysis. Substantively, the Seventh Circuit’s decision reaffirms a longstanding agency regulation prohibiting creditors from discouraging applications on the basis of certain protected grounds by making statements “to applicants or prospective applicants.” See 40 Fed. Reg. 49,298, 49,307 (Oct. 22, 1975).

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