Equal Credit Opportunity Act
CFPB v. Townstone Financial Inc.
Date: July 11, 2024
Issue: Does Regulation B of the Equal Credit Opportunity Act (ECOA), which prohibits discrimination against applicants, apply to prospective applicants?
Case Summary: In a 3-0 decision, a Seventh Circuit panel reversed an Illinois federal court’s dismissal of the Consumer Financial Protection Bureau’s redlining lawsuit against Townstone Financial, concluding Regulation B of ECOA applies to prospective applicants.
While ECOA only refers to applicants, Regulation B under ECOA provides 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.”
In July 2020, the CFPB sued Townstone under ECOA and the Consumer Financial Protection Act (CFPA) in the first-ever redlining complaint against a nonbank mortgage company. The Consumer Financial Protection Bureau (CFPB) alleged Townstone avoided lending in Chicago’s majority-Black areas and made comments that could have discouraged prospective Black customers from applying. CFPB argued the court should follow Regulation B and defer to its interpretation of ECOA because Regulation B is “reasonably related” to the objectives of ECOA. Townstone argued Regulation B did not apply to prospective applicants and, thus, CFPB’s interpretation was overly broad and violated the First Amendment.
In 2023, the district court granted Townstone’s motion to dismiss, ruling Regulation B applies only to credit applicants, not prospective applicants. The court applied Chevron’s two-step framework to determine whether it would defer to CFPB’s Regulation B interpretation. At step one, courts evaluate whether the statutory provision is ambiguous. If so, courts moved to step two to assess whether or not the agency’s interpretation is reasonable. At step one, the court concluded Congress directly and unambiguously spoke on the issue because ECOA only prohibits discrimination against applicants rather than prospective applicants. The court thus declined to grant Chevron deference to CFPB’s interpretation.
In July, the U.S. Supreme Court overturned Chevron in Loper Bright Enterprises v. Raimondo. The Court ruled Chevron deference cannot be squared with the Administrative Procedure Act (APA) and with courts’ paramount duty to interpret the laws that Congress enacts. The APA, the Court concluded, codifies for agency cases the proposition reflected by judicial practice: that courts decide legal questions by applying their independent judgment.
Following the Supreme Court’s ruling to overrule Chevron, the Seventh Circuit in Townstone reversed and remanded, ruling ECOA authorizes liability for discouraging prospective applicants. The panel emphasized ECOA’s purpose is to ensure equal access to credit without discrimination. The court noted that Congress vested the Federal Reserve (and later the CFPB) with broad regulatory authority to prevent “circumvention or evasion” of ECOA’s purposes.
The court also found that Regulation B adheres to ECOA’s text and purpose. The panel explained it reads a statute “as a whole” rather than a series of unrelated and isolated provisions. The panel highlighted the civil liability provision, which requires regulatory agencies responsible for enforcing ECOA to refer a case to the attorney general whenever the agency believes a creditor “has engaged in a pattern or practice of discouraging … applications for credit in violation of section 1691(a) of this title.” Thus, in the panel’s view, Congress confirmed that discouraging a credit application violates ECOA.
The panel concluded that ECOA prohibits not only outright discrimination against credit applicants but also discourages prospective credit applicants. The panel explained the term “applicant” cannot be read in a “crabbed fashion” because this frustrates ECOA’s purpose. The panel thus found ECOA prohibits discrimination for any aspect of a credit transaction, including before an applicant submits a credit application.
Bottom Line: By affirming that ECOA’s protections extend to prospective applicants, the Seventh Circuit broadened the statute’s scope to encompass pre-application conduct. Separately, the Seventh Circuit declined to rule on the merits of CFPB’s First Amendment claim. The panel observed such analysis is best left for the district court to address on remand.
Documents: Opinion
