The Seventh Circuit Court of Appeals heard the oral arguments in the case brought by the Consumer Financial Protection Bureau (CFPB) against Townstone Financial. The CFPB appealed a district court’s decision earlier this year, finding that “prospective applicants” were outside of the bureau’s statutory authority under the Equal Credit Opportunity Act (ECOA).
The bureau accused Townstone and its owner Barry Sturner of violating ECOA by making certain comments on its radio show the CFPB claimed would discourage Black consumers from applying for mortgage loans. To support this allegation, it used data collected under the Home Mortgage Disclosure Act (HMDA) indicating the lender was closing fewer loans for Black homebuyers than its peers.
The judge in the lower court, Franklin Valderrama, was the first federal judge to make a determination on how this anti-discouragement provision impacts the enforcement of ECOA, which has clear definitions for when a person is or is not considered an applicant.
In dismissing the CFPB’s complaint against Townstone, Valderrama relied on Chevron, USA v. Natural Res. Def. Council, 467 U.S. 837 (1984), which 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, when he held the clear definition of “applicant” within the definitions section of ECOA did not include statements made and directed toward prospective applicants.
Chevron deference is currently being challenged by multiple cases, with the U.S. Supreme Court hearing arguments to overturn the precedence in January 2024.
Judges of the Seventh Circuit Court of Appeals asked each party questions about their positions. CFPB Attorney Justin Sandberg, representing the bureau, contended ECOA’s operation in conjunction with Regulation B is meant to protect prospective credit applicants from discrimination in the form of discouragement on a prohibited basis.
“The district court erred,” Sandberg said. “Congress has spoken clearly: discriminatory discouragement is unlawful, and the bureau has the authority to prohibit it.”
To establish this authority, Sandberg pointed to the delegation and referral provisions of ECOA. In the lower court, the bureau had argued that by including these sections, Congress understood that additional rules may be necessary to prevent evasions of ECOA’s prohibitions and expressly instructed the regulatory agency to enact those rules. The lower court disagreed with this interpretation, and the appellate judges were also skeptical, as they were concerned about the breadth of authority it would give the CFPB.
Judges also took issue with the bureau’s inability to provide individuals who felt discouraged to apply for credit with Townstone after hearing statements the bureau flagged as discriminatory. While Sandberg referred to discrepancies in Townstone’s HMDA data as evidence that prospective applicants were discouraged, the judge pointed out this only supported a disparate impact theory, not the CFPB’s disparate treatment claim. For these types of claims under anti-discrimination laws, the judge stated the bureau needed to prove consumers of the relevant class were, in fact, discouraged.
On the other side of the table, Townstone argued that if Congress wanted the bureau to have the breadth of authority the CFPB proposes, Congress would have stated it clearly in the statute, and it seemed unlikely that was its intent. Moreover, even if statutory construction would lead to anomalies like the loopholes the bureau described, the Supreme Court has held it is up to Congress to repair those issues, not the courts or agencies.
“The judges clearly understood both side’s arguments,” Pacific Legal Foundation Senior Attorney Steve Simpson and counsel for Townstone Financial told RESPA News. “We are optimistic that the court will affirm the district court’s ruling that ECOA applies only to discrimination against applicants and any changes to the law must come from Congress, not CFPB.”
Consumer groups, like the Consumer Federation of America, urged the court of appeals to reverse the lower court’s decision.
“If a lender can discourage protected classes from applying for credit without fear of prosecution, what is to prevent them from putting a ‘whites-only’ sign out front?” Consumer Federation of America Director of Financial Services Adam Rust said in a release. “Laws to prevent discrimination exist to address real problems, and the half-baked theories behind Townstone do not, and the Seventh Circuit must right this wrong by siding with the CFPB.”