On February 3, 2023, the United States District Court for the Northern District of Illinois granted Defendants Townstone Financial, Inc., a mortgage broker/lender, and Barry Sturner’s, Townstone’s owner, motion to dismiss the Consumer Financial Protection Bureau’s (CFPB or Bureau) redlining complaint brought under the Equal Credit Opportunity Act (ECOA), ECOA’s implementing regulation, Regulation B, and the Consumer Financial Protection Act. CFPB v. Townstone, 2023 WL 1766484 (N.D. Ill. Feb. 3, 2023).
The CFPB filed its claims in July 2020 in what was the Bureau’s first redlining complaint against a nonbank mortgage company. The complaint alleged that Townstone redlined African-American neighborhoods in the Chicago Metropolitan Statistical Area by allegedly discouraging prospective African-American applicants in those areas from applying for mortgages.
The court granted Townstone’s motion to dismiss on the basis that the ECOA applies only to applicants—not to prospective applicants. The court applied the Supreme Court’s two part test from Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. and rejected the CFPB’s arguments that the court should defer to the provisions contained in Regulation B. 467 U.S. 837 (1984). Although Regulation B provides that a creditor shall not make statements to “applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application,” the court held that under Chevron step one, the plain language of ECOA “clearly and unambiguously” prohibits discrimination against applicants only and that under ECOA, applicants are defined as “a person who applies to a creditor for credit.” 2023 WL 1766484 at *5 (emphasis added). Thus, the court concluded that “Congress has directly and unambiguously spoken on the issue at hand and only prohibits discrimination against applicants,” and thus it did not need to reach Chevron step two to consider whether Regulation B, as the agency interpretation, reflects a permissible construction of the statute. Id. at *5-*6. The court noted that its decision was in line with previous Seventh Circuit precedent in Moran Foods, Inc. v. Mid-Atlantic Market Development Co., LLC, 476 F.3d 436, 441 (7th Cir. 2007) that also found the ECOA’s definition of “applicant” to be unambiguous.
The court also rejected the CFPB’s attempts to “bypass Chevron by way of” Mourning v. Fam. Publ’ns Serv., Inc., 411 U.S. 356 (1973). In Mourning, the Supreme Court held, in the context of TILA’s delegation provision, that the Federal Reserve Board did not exceed its authority in promulgating a portion of Regulation Z because the rule was “reasonably related” to the purposes of TILA. 11 U.S. at 369. The Townstone court reasoned that the Mourning analysis is only relevant to Chevron step two and, thus, was “inapplicable” because ECOA’s language was unambiguous. 2023 WL 1766484 at *10. This ruling is consistent with the longstanding position taken by mortgage lenders that similar redlining claims may not be brought under the ECOA because the ECOA is only applicable to applicants.
Should the CFPB decide to appeal to the Seventh Circuit rather than test its ECOA-based redlining theory in other district courts without an intervening Court of Appeals decision, its deadline to do so is March 6, 2023.
This decision represents a setback to the Bureau’s efforts to broadly regulate mortgage lending discrimination. However, given that the Bureau revised its unfair, deceptive, or abusive acts or practices examination manual in 2022 to state that discrimination conduct can trigger liability, the Bureau may continue to attempt to police such discrimination claims through the CFPA regardless of whether it suffers similar ECOA-based impediments.
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