Fair Lending’s New Groove

Recent litigagion may bleed into fair lending and agency regulation

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Two recent federal court opinions from the Supreme Court and one from the 7th Circuit Court of Appeals will likely have significant impacts on the future of fair lending regulation, enforcement, and litigation. As a result of these decisions, historical deference to agencies’ interpretation of laws is diminished while redlining enforcement may be emboldened.

The decision in Loper Bright Enterprises, et al. v. Raimond, largely eradicates the perceived authority and credibility of federal agency interpretations of vague or ambiguous laws. On June 28, 2024, the United States Supreme Court overturned longstanding precedent (widely known as “Chevron”) that for 40 years had required courts to defer to agency interpretations when a statute was silent or ambiguous concerning the specific issue at hand. Chevron previously required courts to engage in a two-step process when analyzing an agency’s interpretation of law. The first step of Chevron required a court to determine whether Congress had spoken directly to the precise question at issue. If Congress had spoken to the precise question in an unambiguous manner, then the agency and courts were bound by what Congress wrote. However, if Congress had not spoken clearly to the precise question at issue, then Chevron required courts to move on to step two, which required courts to defer to an agency’s reasonable interpretation of the statute at issue.

In overturning Chevron, the Loper Bright Court replaced the Chevron two-step framework with an “independent judgment” standard. Specifically, under Loper Bright, courts now “must exercise their independent judgment in deciding whether an agency has acted within its statutory authority … [and] under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.” In other words, under Loper Bright, courts cannot defer to an agency’s interpretation of the law, whatsoever — even if the interpretation is reasonable.

The Loper Bright decision may result in more industry challenges to controversial agency interpretations because it theoretically levels the playing field between regulatory agencies and industry players that wish to go to court over an agency’s interpretation of an ambiguous law. The increased prospect that an agency interpretation of law will be struck and rendered unenforceable could also motivate agencies to settle matters more frequently. Nonetheless, excitement around Loper Bright should be tempered. There will be many occasions in which a court’s independent exercise of judgment will be consistent with the agency’s interpretation of law. The Townstone 7th Circuit Court of Appeals decision is a perfect example.

On July 11, 2024, just two weeks after the Loper Bright decision was issued by the Supreme Court, the 7th Circuit Court of Appeals sided with the CFPB and reversed the federal district judge’s decision in the Townstone Financial nonbank redlining case concerning allegations of ECOA violations. Applying Loper Bright, the 7th Circuit panel exercised its own independent judgment in lieu of the two-step Chevron framework. The Court held that Congress intended for agencies to prevent “circumvention or evasion” of the Equal Credit Opportunity Act (ECOA) and permitting discouragement of prospective applicants would thwart that intention. Further, the Court pointed to the law that requires agencies to refer “pattern or practice” discrimination cases to DOJ, including cases where a creditor “engaged in a patten or practice of discouraging … applications for credit.” According to the 7th Circuit, this law demonstrates that ECOA was intended to regulate conduct relating to prospective applicants.

In the near term, the 7th Circuit decision in Townstone will likely embolden the CFPB to continue its pursuit of redlining actions; however, this decision may be less consequential in the long term. Importantly, the 7th Circuit decision does not address whether Townstone actually engaged in redlining or violated ECOA. This issue has been remanded to the District Court for further proceedings. Townstone may also appeal the 7th Circuit’s decision, which could be overturned. Moreover, lenders facing redlining allegations outside of the 7th Circuit are not bound by this decision and courts in other jurisdictions are free to interpret ECOA differently in redlining cases.

The CFPB’s theory of modern-day redlining has not been tested in court after the Supreme Court’s recent decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll. The admissions process that was found to violate the Equal Protection Clause in Harvard bears many similarities to the redlining remediation efforts currently required by agencies. Racial quotas and targets designed to achieve racial balancing for underrepresented racial groups present serious constitutional concerns, particularly when efforts to achieve that balancing are done at the expense of other racial groups. The Harvard decision could render the agencies’ theory of modern-day redlining unconstitutional, which would limit the significance of the 7th Circuit Townstone ruling.

In the end, Loper Bright may better insulate the mortgage industry from agency enforcement trends that ebb and flow with the political leanings of the executive branch of government. However, even with courts no longer deferring to agency interpretations of law, a court’s independent judgment may be consistent with an agency’s interpretation, as was the case in Townstone. While the Loper Bright decision is expected to result in more successful challenges to agency interpretations of law, the Townstone decision illustrates why Loper Bright will not always rescue regulated industries from aggressive agency enforcement.