​In Bureau of Consumer Financial Protection v. Townstone Financial, Inc., the Consumer Financial Protection Bureau (“CFPB”) brought suit against Townstone, a mortgage broker/lender, and its co-founder and chief executive, Barry Sturner (“Sturner”) for alleged violations of the Equal Credit Opportunity Act (“ECOA”). Specifically, the CFPB alleged that Townstone had violated an ECOA provision prohibiting discrimination against prospective credit applicants on the basis of their race when Sturner and other Townstone representatives made a series of racially discriminatory comments on Townstone’s weekly radio show/podcast, called the “Townstone Financial Show.” According to the CFPB’s amended complaint, the “Townstone Financial Show” is a long-form commercial advertisement for Townstone, wherein its hosts discuss mortgage-related issues and take questions from prospective applicants. The CFPB alleged that on more than one occasion, Sturner and other Townstone representatives made comments that would discourage African-American prospective applicants from applying for mortgage loans from Townstone.

What You Need to Know:

• The Consumer Financial Protection Bureau (“CFPB”) is the primary federal agency responsible for regulating the consumer finance industry, and is the agency primarily responsible for enforcing violations of the Equal Credit Opportunity Act (“ECOA”).
• ECOA prohibits any lender from discriminating “against any applicant, with respect to any aspect of a credit transaction—on the basis of race, color, religion, national origin, sex or marital status, or age”.
• ECOA does not address alleged discriminatory conduct that might discourage a possible borrower from applying for a loan.
• CFPB promulgated ECOA regulations, Regulation B specifically, that seek to prohibit conduct by a lender that might discourage a possible borrower from seeking a loan from that lender are not consistent with ECOA’s clear application to only actual loan applicants. That regulatory provision is effectively void.

Namely, the CFPB’s amended complaint describes:

•  A January 2014 episode where a caller from Markham, Illinois (a city with an 80.3% African-American population) was told to “stop spending freaking money [on his wife] and tell her to get a better job,” and while discussing the couple’s credit, was further told “You drive very fast through Markham and you don’t look at anybody or lock on anybody’s eyes in Markham…”
• A June 2016 episode where Sturner described the south side of Chicago as “hoodlum weekend” between Friday and Monday;
• A January 2017 episode where Sturner and other hosts described a Chicago Jewel-Osco location as the “jungle Jewel;”
• A November 2017 episode where Townstone’s senior loan officer equated the rush of skydiving with the rush of walking through the south side of Chicago late at night;
• Among other derogatory comments directed at the general pool of potential African-American applicants, but who had not yet submitted mortgage applications.

By its amended complaint, the CFPB asserted that these statements unlawfully discriminated against not actual mortgage applicants but prospective applicants on the basis of their race by discouraging any and all possible borrowers from applying for a mortgage loan from Townstone, which violates ECOA, 15 U.S.C. § 1691(a), and its implementing regulation, Regulation B, 12 C.F.R. § 1002.4(b) (hereinafter referred to as “Regulation B”). Regulation B, which was drafted by the CFPB pursuant to Congress’s delegation authority, makes it unlawful to discriminate against “prospective applicants” rather than actual “applicants” alone, unlike § 1691(a) of the ECOA (which only covers actual “applicants”). In so alleging, the CFPB did not identify in its pleadings any specific or identifiable potential applicant who was allegedly discouraged from applying. Townstone and Sturner moved to dismiss, arguing that the plain language of § 1691(a) only prohibits discrimination against actual “applicants” and, thus, Regulation B’s “prospective applicant” language was improper and a regulatory overreach and, accordingly, should not be relied upon by the court in its analysis. Townstone therefore argued that the CFPB’s allegations failed to state a claim because the CFPB had only alleged discriminatory conduct against prospective applicants.

The U.S. District Court for the Northern District of Illinois agreed with Townstone that ECOA only applied to actual loan applicants and, therefore, the alleged conduct was not actionable under the statute. The court therefore granted Townstone’s motion to dismiss the amended complaint, with prejudice. Central to the court’s analysis of whether the CFPB’s ECOA claims could be based on the alleged action that purportedly discouraged potential minority borrowers from seeking a loan from Townstone was its adherence to the Chevron doctrine, derived from the U.S. Supreme Court’s 1984 decision in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Chevron doctrine sets forth a two-step process for determining whether the language of an administrative regulation may be used to guide a court in interpreting a statute. The first Chevron step is to determine “whether Congress has directly spoken to the precise question at issue.” Cook Cnty. v. Wolf, 962 F.3d 208, 221 (7th Cir. 2020) (citing Chevron, 467 U.S. 837). If the court finds that Congress has spoken to the issue unambiguously, then the court is bound to interpret the statute in that manner, according to its plain language, and without further reference to extraneous resources. If, on the other hand, Congress has not spoken clearly as to the issue, the court can then “consider whether the agency’s interpretation reflects a permissible construction of the statute.” Id.

The court then analyzed the relevant ECOA statute and corresponding regulation using the Chevron doctrine. Looking to § 1691(a) of the ECOA, it provides that “[i]t shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction—on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract) . . . .” The ECOA defines the term “applicant” to mean “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” Id. § 1691a(b).

Notably, however, § 1691b of the ECOA authorizes the CFPB to make regulations to carry out the purposes of the ECOA. One such regulation enacted by the CFPB for this purpose, Regulation B, reads as follows:

Discouragement. 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.

12 C.F.R. § 1002.4(b). Accordingly, the Chevron doctrine required that the court first look to the plain language of § 1691(a) of the ECOA in order to determine whether it clearly only applies to “applicants” and not “prospective applicants,” and if that issue was not clear, the court could then look to Regulation B as a guiding regulation.

Here, the court found that the plain language of § 1691(a) of the ECOA was sufficiently clear as only applying to “applicants” (and not prospective or potential applicants) such that Regulation B could not provide any guidance to the court on the meaning and scope of § 1691(a) of the ECOA.   In effect, the court found that Regulation B’s “prospective applicant” language was an overreach and unenforceable. As a result, the CFPB’s claim that Townstone and Sturner’s comments discriminated against potential mortgage applicants—who had not yet actually applied for a mortgage or other credit—could not stand. The court found that this interpretation was consistent with the way in which courts have interpreted the term “applicant” in other contexts. See Moran Foods, Inc. v. Mid-Atlantic Market Development Co., LLC, 476 F.3d 436, 441 (7th Cir. 2007) (a spouse who guaranteed her husband’s debt was not an “applicant” for purposes of the ECOA); Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937, 942 (8th Cir. 2014) (declining to consider administrative regulation defining term “applicant” where it was clear from ECOA that it did not apply to guarantors); Regions Bank. v. Legal Outsource PA, 936 F.3d 1184, 1193 (11th Cir. 2019) (same). Bound to consider § 1691(a) of the ECOA on its own, the court held that Townstone and its representatives’ comments did not violate the ECOA.

The court also addressed the CFPB’s argument Congress gave the CFPB rulemaking carte blanche by enacting § 1691b (authorizing the CFPB to enact rules to carry out the purposes of the ECOA), citing the U.S. Supreme Court case of Mourning v. Fam. Publications Serv., Inc., 411 U.S. 356 (1973). In Mourning, the Supreme Court found that Congress gave the Federal Reserve broad rulemaking authority to carry out the purposes of the Truth in Lending Act (“TILA”) by including a provision in TILA stating that the Federal Reserve “shall prescribe regulations to carry out the purposes of [TILA].” The CFPB therefore argued that the court did not need to apply Chevron and could instead utilize the ECOA’s delegation provision in order to invoke the “prospective applicants” language from Regulation B. The court, however, disagreed, finding that it is duty-bound to first employ Chevron and could not deviate from that framework. The court cited several Seventh Circuit cases mandating Chevron analysis. See, e.g., Zaragoza v. Garland, 52 F.4th 1006, 1019 (7th Cir. 2022) (applying two-step Chevron framework to decision of Attorney General interpreting federal immigration statutes); Wolf, 962 F.3d at 221 (“The overriding question is whether the agency’s interpretation of the relevant statute is one the text will permit. We approach this inquiry through the two-step framework set forth in Chevron[.]”); Khan v. United States, 548 F.3d 549, 554 (7th Cir. 2008), as amended (Dec. 4, 2008) (reviewing general authority regulations under the two-step Chevron framework). While the court was sympathetic to the CFPB’s concerns in this case and specifically renounced condoning the discriminatory comments alleged here, the court held that it “is duty-bound to follow precedent, which means the Court can only defer to an agency’s interpretation of a statute, no matter how laudable its purpose, when it survives the two-step Chevron framework.”

This holding may represent a hesitancy in the judiciary to construe CFPB regulations as giving cart blanch to the CFPB to promulgate regulations that extend the actual scope of the statutory scheme and purpose beyond what Congress meant to address. The CFPB (and other federal agencies) had long-relied on Regulation B in order to expand the reach of their ECOA enforcement actions. Given that the pool of “prospective applicants” is exponentially larger than the pool of actual “applicants,” reliance on Regulation B permitted the CFPB to maintain enforcement proceedings against a much wider array of lenders. Most recently it relied upon Regulation B in its settlement and related consent order with Trident Mortgage arising from similarly alleged racist or discriminatory attitudes and operations purportedly having a discouraging effect on the pool of potential loan applicants in and around Philadelphia, Pennsylvania. Although only one district judge’s decision in Illinois will clearly not have much precedential weight, the Townstone decision will serve as a basis for lenders and brokers to defend against governmental enforcement proceedings brought pursuant to ECOA for alleged discriminatory conduct that is not laser focused on actual discrimination against identified applicants.

The CFPB has thirty days, or until and including March 6, 2023, to appeal to the Seventh Circuit Court of Appeals. The Consumer Financial Services team at Saul Ewing LLP will continue to monitor this and other relevant cases affecting the consumer finance industry.