The American Civil Liberties Union (ACLU), the National Fair Housing Alliance (NFHA), and nine other housing groups filed an amici curiae brief in support of the Consumer Financial Protection Bureau’s (CFPB) appeal of the U.S. District Court of the Northern District of Illinois’ finding in favor of Townstone Financial.
The judge in the lower court held earlier this year that the bureau overextended its statutory reach in applying the Equal Credit Opportunity Act (ECOA) to actions taken before consumers had actually attempted to apply for credit. The decision came at the end of a six-year legal battle, where the bureau had accused Townstone of violating the act based on statements made during a talk show sponsored and written by the business, as well as the data collected under the Home Mortgage Disclosures Act. The theory, known as “modern-day redlining,” has been used multiple times by the bureau, and Townstone was the first company to push back.
In the amici brief, the groups stated Regulation B, ECOA’s implementing regulation, clarifies the statute’s protections prohibit discouraging protected groups from applying for credit in the first place, a “common sense understanding” endorsed by Congress since 1975. U.S. District Court Judge Franklin Valderrama’s holding that ECOA does not reach any pre-application discriminatory acts is contrary to these protections, the brief argues.
“This position would severely limit ECOA’s protections and provide a roadmap for evasion of the act,” the groups wrote. “The federal law designed to eradicate credit discrimination would have no application, for example, to a creditor turning away a nonprofit because of its religious affiliation, so long as the nonprofit is turned away before applying.”
According to the brief, the lower court’s holding ignored ECOA’s statutory delegation – first to the Federal Reserve Board, and now the CFPB – to prescribe regulations, including “adjustments and exceptions” that are “necessary or proper to effectuate the purpose of [ECOA]” and to “prevent circumvention or evasion thereof.”
To maintain the ruling would disrupt the uniform regulatory fair lending supervision system for banks and nonbanks, the housing groups argued. While small banks would still be supervised for pre-application mortgage discrimination under the Fair Housing Act, they wrote, no agency would supervise the pre-application mortgage activities of nonbank lenders. It also would leave “virtually no protections” for pre-application discrimination in non-mortgage credit markets, such as small-business, auto, and personal loans.
“Systemic racial inequality has cost our nation trillions of dollars in economic growth,” the groups stated. “One study estimates that improving access to housing credit would have resulted in an additional 770,000 Black homeowners and $218 billion in sales and expenditures. Another estimates that addressing racial disparities in homeownership could create nearly 800,000 jobs and generate $400 billion in tax revenue. This analysis found that by not addressing housing inequality, nearly 5 million people have been denied homeownership opportunities.
“Eliminating racial inequities in the United States could add $5 trillion of growth to our GDP over the next five years,” they added. “The inequities in our markets and systems also stifle innovation, productivity, profitability, and economic progress. Credit discrimination not only harms individuals, it also inhibits the nation’s economic viability.”