Chicago-based Townstone Financial has chosen to settle its long-standing dispute with the Consumer Financial Protection Bureau (CFPB) over allegations that Townstone engaged in discriminatory lending, to include “redlining African American neighborhoods in Chicago.”
Awaiting court approval, the proposed order, filed Nov. 1, would require Townstone to pay a $105,000 penalty to the CFPB’s victims relief fund and establish internal tracking and reporting processes for monitoring compliance with the Equal Credit Opportunity Act (ECOA).
Notably, the order does not require Townstone to open branches in areas it was alleged to have redlined, as has been required of other mortgage lenders that the CFPB has recently settled redlining cases against, like Fairway Independent Mortgage Corporation, or the first credit union federal regulators have succeeded in tagging for redlining, Citadel Federal Credit Union.
The order includes a dismissal with prejudice for Townstone President and CEO Barry Sturner, the only individual named as a defendant, with the parties to pay their own costs and fees.
The CFPB's proposed settlement leaves significant legal questions unanswered as regulators continue cracking down on what they call "modern-day redlining." Attorneys across the mortgage industry have voiced concerns that regulators are blurring the line between redlining allegations and demands for lenders to engage in race-based lending, in ignorance or defiance of the Supreme Court’s June 2023 decision in Students For Fair Admissions v. Harvard rejecting race-based decision making in college admissions.
By using what Fairway Independent, for example, characterized as a "quota analysis," proportional loan distributions have led regulators to be accused of manufacturing perceptions of discriminatory lending and redlining, pushing lenders to manufacture fair lending compliance.
Filed July 2020, the CFPB’s initial complaint against Townstone underscored comments made by Sturner and a guest co-host on radio broadcasts of the Townstone Financial Show, during which the company marketed its services, as offensive to the extent that they created a barrier to prospective applicants' equal access to mortgage credit. The comments identified as constituting redlining were made over a four-year period and accounted for 10 minutes of air-time out of 10,000 minutes aired during that period.
The Townstone case raised legal questions including whether the Equal Credit Opportunity Act (ECOA) granted regulators’ the authority to sue lenders on behalf of prospective applicants, the extent to which public discussions of controversial topics is protected free speech or discriminatory marketing, the use of disparate impact analyses to establish factual bases for redlining, and whether mortgage lenders have an affirmative obligation to consider race in business decisions.
Attorneys from Garris Horn, LLP, earned Townstone an initial dismissal in district court on the grounds that the CFPB lacked statutory authority to enforce ECOA for prospective applicants — only actual applicants — under the ECOA's Regulation B.
The 7th Circuit Court of Appeals reversed the district court’s decision, though, affirming the Bureau’s authority under Regulation B and remanding the case to the lower court. The proposed settlement, which rests on that statutory finding, leaves concerns over free speech, race-based affirmative lending, and the use of data to infer modern-day redlining “without adjudication of any issue of fact or law.”
