What started as a run-of-the-mill redlining complaint brought by the Consumer Financial Protection Bureau (CFPB) ended as a David-versus-Goliath-type battle between the agency and a small mortgage company in Chicago called Townstone Financial.

Along with its owner Barry Sturner, Townstone was charged with violating the Equal Credit Opportunity Act (ECOA) and the Consumer Financial Protection Act (CFPA), as well as allegations Sturner fraudulently transferred assets in violation of 28 USC §§ 3301–3308, a statute governing fraudulent transfers involving debts.

The complaint was filed in 2020 after the bureau spent years investigating Townstone’s lending and marketing practices. After a tense legal battle, Federal Judge Franklin Valderrama of the U.S. District Court for the Northern District of Illinois, Eastern Division, granted Townstone and Sturner’s motion to dismiss, agreeing the CFPB improperly attempted to expand ECOA’s reach beyond the explicit language of the statute.

It came down to the definition of “applicant” as defined by ECOA. Under the statute, an “applicant” is “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.”

In its discussion, the court pointed to the legal test under Chevron, USA v. Natural Res. Def. Council, 467 U.S. 837 (1984). This long-established theory requires deference to an agency’s interpretation of the laws it administers so long as Congress has not spoken to the precise question at issue, and the court finds the interpretation reflects a permissible construction of the statute.

In this instance, where the question turned on the definition of applicant, the court did not need to address the second prong of its Chevron analysis because the definition of “applicant” in ECOA precludes the CFPB’s interpretation.

“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 opined. “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.”

Townstone and Sturner were able to further solidify this interpretation by pointing out the entirety of ECOA is centered on applicants, as the word is used 26 times in its text and does not prohibit nor discuss conduct prior to the filing of an application. Therefore, ECOA has clearly marked its boundaries, and the CFPB cannot regulate beyond them.

“To be clear, the court appreciates the expertise of the CFPB in implementing the ECOA and commends its attempts to prevent the deplorable practice of discouraging people, on the basis of race, from applying for credit,” Valderrama wrote. “The practice of limiting credit to individuals based on criteria other than creditworthiness is as odious as it is offensive.

“However, the court 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. The anti-discouragement provision of Regulation B with respect to ‘prospective applicants’ does not survive Chevron step one, so the court does not defer to the CFPB’s interpretation.”

Sean Burke, partner at Mattingly Burke Cohen & Biederman, LLP, told RESPA News his firm and Proteus Discovery group have been involved with Townstone and Sturner since 2017, shortly after the bureau began its investigation. Richard Horn, co-managing partner of Garris Horn, got Burke and his team involved to assist in preserving and processing data to help interface with the CFPB. Once the investigation turned into litigation, Burke said they remained an active part of the process.

Burke said the team was not surprised by the court’s decision.

“All along we believed that we would prevail. It was a just a matter of whether the CFPB was able to force Townstone and Mr. Sturner to settle prior to getting a ruling on the merits,” Burke said. “We presented essentially two arguments in our motion to dismiss – one based on the regulation being unsupported by the enabling legislation (ECOA), and two based on the first and fifth amendments of the Constitution. 

“Even if the court found that Reg B was authorized by ECOA, we firmly believed that it was blatantly unconstitutional,” he continued. “Because the court found in our favor on the ECOA argument, there was no need for the court to consider our very strong constitutional arguments.  Even if the bureau survived the motion to dismiss and the case proceeded to trial, the evidence does not support an inference that Townstone or Mr. Sturner was racist.  In fact, the evidence would have shown just the opposite.”

Burke said while they are thrilled the motion to dismiss was granted, one unfortunate side effect of not going to trial is Sturner is unable to refute the allegations the CFPB brought and introduce himself as a solid businessman, good person, and upstanding citizen.

This may not be the end of the case, despite the judge’s statement that this was “the end” – the bureau does have an opportunity to appeal the ruling to the Seventh Circuit, and Burke said it is likely that it will. Should the district court’s analysis survive, Townstone and Sturner will consider its next steps from a legal standpoint.

When it comes to going forward on a business standpoint, Burke said it is “business as usual” for Townstone, which will continue to offer competitive mortgage products and help its customers “get their slice of the American dream of homeownership.”

“I hope that the ruling has the effect of forcing the bureau to lay out clear, precise, and legally supportable regulations and end the bureau’s tendency to regulate by enforcement,” Burke said. “Fair lending is an important issue that should be tackled appropriately, not through ‘gotcha’ litigation.”

Want more from the legal team who argued this case? Catch a more in-depth look in our upcoming special report on fair lending.