As previously reported, in July 2020 the CFPB filed the first ever redlining complaint against a nonbank mortgage company, Townstone Mortgage (Townstone), under the Equal Credit Opportunity Act (ECOA) and Consumer Financial Protection Act (CFPA).  The US District Court for the Northern District of Illinois recently granted Townstone’s motion to dismiss the CFPB’s complaint on the grounds that the ECOA applies to applicants and not to prospective applicants.   The court ruled in favor of the position long maintained by mortgage and other credit industry participants that a redlining claim may not be brought under the ECOA because the statute only applies to applicants.

While the ECOA only refers to applicants, Regulation B under the ECOA provides that a “creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” (Emphasis added.)  The CFPB argued that the court should follow Regulation B,  and should defer to its interpretation of the ECOA reflected therein because the regulation is “reasonably related” to the objectives of the ECOA.  In support of that position the CFPB cited Mourning v. Family Publications Services, Inc. a Truth in Lending Act case in which the Supreme Court applied that standard to uphold portions of Regulation Z adopted by the Federal Reserve Board.  The court rejected that argument and applied the test set forth by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. regarding whether a court should defer to an agency interpretation of a statute.

As explained by the court, the Chevron test is a two-step test.  “The first step of Chevron is to determine whether Congress has directly spoken to the precise question at issue. If Congress has spoken to the precise question at issue unambiguously, then that is the end of it: the agency and courts alike are bound by what Congress wrote. However, if Congress has not spoken clearly, the court moves on to step two, in which the court consider[s] whether the agency’s interpretation reflects a permissible construction of the statute.” 

The court concluded that the “plain text of the ECOA . . . clearly and unambiguously prohibits discrimination against applicants, which the ECOA clearly and unambiguously defines as a person who applies to a creditor for credit. The Court therefore finds that Congress has directly and unambiguously spoken on the issue at hand and only prohibits discrimination against applicants. As such, that is the end of it and the Court need not move on to the second step of the Chevron analysis because it is clear that the ECOA does not apply to prospective applicants.” (Internal quotation marks and citations removed.)

The court observed that the CFPB also argued that “it has more expansive enforcement powers than the private right of action [under the ECOA], and moreover, its authority to prohibit discouragement of “prospective applicants” does not require stretching the term “applicant” to encompass “prospective applicants.””  The court disagreed with the CFPB’s position.  The court stated that the “CFPB’s authority to enact regulations is not limitless,” and that the “CFPB cannot regulate outside the bounds of the ECOA, and the ECOA clearly marks its boundary with the term “applicant.””

As previously reported, in 2022 the CFPB revised its unfair, deceptive, or abusive acts or practices (UDAAP) examination manual to provide that discrimination is covered by the unfair element.  The CFPB directed its examiners to apply the CFPA’s unfairness standard to conduct considered to be discriminatory whether or not it is covered by the ECOA.  That action prompted criticism and a lawsuit from trade groups.  Updates on the lawsuit may be found here and here.  One has to wonder if the CFPB will now attempt to use this theory against Townstone. 

The US Department of Housing and Urban Development (HUD) and the US Department of Justice (DOJ) have the authority to bring claims under the Fair Housing Act (Act).  As previously reported, in October 2021 the DOJ announced a major initiative to combat redlining.  The Act has language that differs very much from the language in the ECOA.  In particular, among other prohibitions, the Act provides that it is unlawful:

• To “refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.”  (Emphasis added.)
• To discriminate in the sale or rental, or to otherwise make unavailable or deny, a dwelling to any buyer or renter because of a handicap.”  (Emphasis added.)
• “[F]or any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” (Emphasis added.)

For purposes of the Act, a “residential real estate transaction is defined as “any of the following:

(1) The making or purchasing of loans or providing other financial assistance-

(A) for purchasing, constructing, improving, repairing, or maintaining a dwelling; or

(B) secured by residential real estate.

(2) The selling, brokering, or appraising of residential real property.”  Thus, the Act provides an avenue for the pursuit of redlining claims against mortgage lenders, and other providers of services covered by the Act. 

The ball is now in the CFPB’s court as to whether it will seek to challenge this ruling by appealing to the US Court of Appeals for the Seventh Circuit.  That would appear to be a risky move.  The Seventh Circuit could agree with the district court based on the plain text of the ECOA, and the very different language that Congress used in the Fair Housing Act to address redlining.  If the Seventh Circuit ruled in favor of the CFPB, then Townstone could seek Supreme Court review, and the CFPB would likely face an uphill battle if the Court took the case. 

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