The U.S. Court of Appeals for the Seventh Circuit has reversed a district court’s decision, ruling on July 11 that the Consumer Financial Protection Bureau (CFPB) has broad authority to discourage discrimination to combat redlining, which allowed the CFPB to score a statutory victory in its case against Townstone Financial.
Attorneys for Townstone had argued that the CFPB lacks statutory authority to apply Regulation B, which protects applicants from discrimination in any aspect of a credit transaction, to prospective applicants.
The court stated, “We hold that Regulation B’s prohibition on the discouragement of prospective applications is consistent with the plain text of the ECOA. We do not, however, express an opinion on the underlying merits of the CFPB’s claim. Such analysis is best left for the district court to address on remand.”
Commenting on the court's decision, "it is surprising that the Court ruled in favor of the CFPB, particularly in light of the Supreme Court’s decision to overturn Chevron and how difficult it is to establish damages when you’re bringing a claim based on prospective, not actual, applicants," said Daniella Casseres, partner and head of the mortgage regulatory practice group at Mitchell Sandler.
The Allegations
The complaint, filed July 2020, largely centers around comments made by Sturner and a guest co-host during a radio broadcast of the Townstone Financial Show, during which Townstone marketed its services.
In January 2014, while wrapping up an episode of the show, Sturner stated, “it’s a great time to buy, it’s a great time to rent, it’s a great time to sell.” The episode’s co-hosts, a local realtor and a bankruptcy attorney, then gave advice on how to get a home ready for sale, which included “change the light fixtures,” “paint it from top to bottom,” and “take down the Confederate flag.”
In the complaint, the CFPB alleges the two were joking about a “symbol of racial animus” or “implying that the Townstone Financial Show’s hosts and listeners might display such symbols in their homes would discourage African-American prospective applicants from applying for mortgage loans with Townstone.”
The complaint mentions another episode in which a caller from Markham, Illinois, asked how he and his wife could improve their credit scores. Markham, a city in Cook County, Illinois, has a 80.3% Black or African-American population, according to the U.S. Census Bureau.
The complaint states that Sturner responded that the caller’s wife is “a woman and she probably doesn’t have good credit because she’s a woman,” that “[you’ve] got to keep those women in line over there in Markham,” and “stop spending freaking money [on his wife] and tell her to get a better job.” The CFPB claimed that additional, disparaging comments were made about the majority-African-American city, such as, “it’s crazy in Markham on weekends,” that people should drive fast through the city, and avoid locking eyes with locals.
The CFPB claims that other racist comments were made in 2016, in which Sturner allegedly stated that the South Side of Chicago is “hoodlum weekend” between Friday and Monday, and in 2017, Sturner described a JewelOsco grocery store in downtown Chicago as “Jungle Jewel.”
The CFPB claims such comments would discourage African-American prospective applicants from applying to Townstone for a mortgage loan. The bureau also claims such comments discourage other prospective applicants from buying properties in African-American neighborhoods.
The Litigation
The CFPB initiated a redlining enforcement action against the company in 2020, but last year the U.S. District Court for the Northern District of Illinois dismissed the CFPB’s action. On appeal, the CFPB argued that its interpretation of ECOA is supported by the historical context of Regulation B and has not been contested by Congress.
The 7th Circuit left it to the district court to determine whether the defendants’ alleged conduct was prohibited discouragement under ECOA, and whether the defendants’ argument that their allegedly unlawful conduct is protected by the First Amendment’s guarantee of free speech. Townstone and its attorneys may also still decide to appeal this 7th Circuit decision to the Supreme Court on whether ECOA encompasses prospective applicants at all.
The appellate decision comes as the CFPB and Department of Justice (DOJ) have renewed efforts to combat redlining since the DOJ launched its new Combatting Redlining Initiative in October 2021.
Fair lending experts and attorneys have warned that recent enforcement actions brought against mortgage lenders by the CFPB and the DOJ risk blurring the line between redlining allegations and demands for lenders to engage in race-based lending.
Steve Simpson, director of separation of powers litigation for the Pacific Legal Foundation and defending attorney of Chicago-based Townstone Financial, said in the June issue of Mortgage Banker Magazine that “any disparity in a bank’s lending to one group or another is just held to be de facto redlining,” under a modern theory of redlining that relies on proportional loan distribution.
Under the government's theory, says Paul Hancock, partner at K&L Gates who spent more than twenty years in senior roles at the DOJ developing and implementing the U.S. government’s fair lending enforcement programs, "you can eliminate redlining by just making fewer loans in white areas. You’re not doing any more in minority areas. You’re making fewer loans in white areas and somehow that solves your legal problem."
"Despite the Court’s decision," Casseres continued, "lenders may still consider defending themselves through litigation when faced with redlining allegations associated with large settlements and reputational harm."
