On February 3, an Illinois federal court dismissed a case brought by the Consumer Financial Protection Bureau (CFPB) against Townstone Financial, Inc., a Chicago mortgage lender, for alleged violations of the Equal Credit Opportunity Act (ECOA) for purportedly discouraging prospective African American applicants in the Chicago metropolitan area from applying for mortgages. Townstone moved to dismiss, arguing the suit was an attempt by the CFPB to expand the reach of the ECOA to “prospective applicants,” when the statute itself only prohibits discrimination against “applicants.”
In the complaint, which asserts redlining and discouragement claims under the ECOA, the CFPB alleged that from 2014 through 2017, Townstone drew around 2,700 applicants, only 37 (1.4%) of which came from African Americans in the Chicago metropolitan area. During that same period, it drew only five or six applications (0.8%) each year from high-African American neighborhoods even though such neighborhoods make up 13.8% of the census tracts. While Townstone allegedly drew between 1.3% and 2.3% of its applications for properties in majority-African American neighborhoods, from 2014 through 2017, its peers drew many times more (between 7.6% and 8.2%). The CFPB alleged that Townstone’s acts, including comments made on its podcast, discouraged prospective African American applicants, and that the ECOA’s implementing regulation, Regulation B, extends the ECOA’s prohibition to discouraging “potential applicants.” Townstone argued that the CFPB was attempting to expand the reach of the ECOA, which regulates the company’s behavior towards applicants for credit, but does not regulate behavior towards prospective applicants who have not yet applied for credit. The district court agreed with Townstone, specifically finding “[t]he CFPB’s authority to enact regulations is not limitless.”
When performing its Chevron analysis of the ECOA, the court found “the word ‘applicant’ is used twenty-six times in the statute, and the statute does not prohibit or discuss conduct prior to the filing of an application.” The court found that because the text of the ECOA is unambiguous, it owed no deference to the definition of “applicant” under Regulation B. It therefore held, “[t]he CFPB cannot regulate outside the bounds of the ECOA, and the ECOA clearly marks its boundary with the term ‘applicant.'” The court further dismissed the CFPB’s ECOA count with prejudice because “any amendment would be futile.”
Our take: The scope of the ECOA has been attacked from both directions in recent litigation. Some courts have held that a person who has already received credit is not an “applicant,” and therefore is not covered by the ECOA; the CFPB and Federal Trade Commission filed amicus briefs in some of those cases asserting the opposite view. Now, the Townstone court has limited the definition of “applicant” to exclude persons who have not yet applied for credit, and a plain-language reading of the statute supports this conclusion. This latter holding has very significant implications for ECOA claims based on advertising (including based on online targeted advertising), which would be barred under the reasoning of the Townstone decision. Notably, however, it would not impact mortgage redlining cases brought by the U.S. Department of Justice (DOJ), because the DOJ can also rely on the Fair Housing Act, which is not limited to “applicants.” The CFPB has no authority to bring claims under the Fair Housing Act, and so if this holding is more widely adopted among federal courts, it may force the CFPB to refer all redlining cases to the DOJ in the future.
It is likely that the CFPB will seek to appeal this decision. We will, of course, monitor this issue and continue to post updates here.