In one of the most prominent cases referencing Chevron deference and dealing with how the Consumer Financial Protection Bureau (CFPB) interpreted the Equal Credit Opportunity Act (ECOA) to include actions directed toward prospective applicants, the Seventh Circuit Court of Appeals overturned the lower court’s decision in CFPB v. Townstone Financial, Inc., et al.

Both parties made supplemental arguments on how the Supreme Court’s June decision overturning Chevron deference supported their positions. The three-judge panel determined the statute read “as a whole” did not support Townstone’s argument.

Why Chevron matters

In the 6-3 opinion Loper Bright Enterprises v. Raimondo, the court held, “The Administrative Procedure Act [APA] requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous; Chevron is overruled.”

Prior to the Loper opinion, in the event a court determined Congressional intent to be ambiguous, the judge would defer to the agency’s interpretation of the statute it was enforcing. U.S. District Judge Franklin Valderrama relied on Chevron when he granted Townstone’s motion to dismiss in February 2023 using the threshold question of whether Congress’ intent was ambiguous when it came to who the statute protected.

Valderrama determined the legislature’s intent was clearly in favor of Townstone and dismissed the complaint. The CFPB appealed, and the Seventh Circuit Court of Appeals heard arguments in December.

In the CFPB’s supplemental brief to the appellate court on Chevron’s influence on Townstone, it argued Loper Bright supported the conclusion that ECOA was a valid exercise of the bureau’s authority. It stated the conclusion of this matter did not depend on agency deference – the agency interpretation, it asserted, was correct.

“[I]n Loper Bright, the [Supreme C]ourt noted that ‘Congress has often enacted statutes’ under which the ‘agency is authorized to exercise a degree of discretion,’ including statutes ‘empowering an agency to prescribe rules to fill up the details of a statutory scheme’ or ‘to regulate subject to the limits imposed by a term or phrase that leaves agencies with flexibility,’” the bureau stated.

“Section 1691b(a) is such a delegatory statute: it empowers the bureau to ‘prescribe regulations’ that in its ‘judgment’ ‘are necessary or proper to effectuate the purposes of this subchapter’ or ‘to prevent circumvention or evasion thereof,’” it added. “And, importantly, the court stated that ‘when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation….’”

Townstone’s argument highlighted Loper’s determination that courts must apply the tools of statutory construction to determine a statute’s best reading, as they would in other contexts.

“This mandate applies as much to express delegations as to other parts of a statute, for ‘the scope of an agency’s own power’ is ‘perhaps the occasion on which abdication in favor of the agency is least appropriate,’” Townstone explained.

“What the [Supreme C]ourt did not do [emphasis in original] in Loper Bright is usher deference out the front door while surreptitiously escorting it back in through the rear, as CFPB seems to think,” it continued. “True, the court recognized what has always been so – that courts must respect delegations to agencies to fill up statutory details. But their job remains to discern the best reading of the statute as a whole, which includes ‘policing the outer statutory boundaries’ of a delegation, and ‘ensuring that the agency acts within it.’ This is consistent with Board of Governors of the Federal Reserve System v. Dimension Fin. Corp., which held that a delegation similar to ECOA’s ‘only permits the board to police within the boundaries of the act.’”

Circuit’s ruling

The Seventh Circuit Court of Appeals’ holding came less than a month after Loper Bright was decided, siding with the bureau and holding that when ECOA was read “as a whole,” it was “clear that Congress authorized the imposition of liability for the discouragement of prospective applicants.”

In its discussion, the appellate court examined the textual history of ECOA and Regulation B, the act’s implementing statute. It explained how Congress enacted ECOA in 1974, then amended it in 1976. At the time, enforcing authority was assigned to the Federal Reserve Board (the Board).

“The ECOA defines ‘applicant’ as ‘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,’” the court quoted.

“The text of the ECOA vested the Board with broad regulatory authority: ‘The Board shall prescribe regulations to carry out the purposes of this title. These regulations may contain but are not limited to such classifications, differentiation, or other provision, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of this title, to prevent circumvention or evasion thereof, or to facilitate or substantiate compliance therewith.’”

The appellate court explained this was a broad granting of authority modeled after similar language found in the Truth in Lending Act (TILA). An earlier ECOA draft had called for less authority, but the Board argued for the same regulatory authority afforded by TILA, asserting it had withstood several litigation challenges since 1969 and appeared to be an appropriate model. Congress accepted this view, and made said modification.

When Congress added additional protected classes in 1976, the Board amended Regulation B (ECOA’s implementing statute) to prohibit discouragement on a “prohibited basis.”

When ECOA rulemaking authority transferred from the Board to the CFPB, per the Dodd Frank Act, the CFPB republished Regulation B, including the provision on 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.”

“An analysis of the text of the ECOA as a whole makes clear that the text prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit,” the court explained. “Congress vested the Board (and later the bureau) with the authority to issue regulations ‘necessary or proper to effectuate the purposes of this title’ or ‘to prevent circumvention or evasion thereof.’

“In endowing the Board with authority to prevent ‘circumvention or evasion,’ Congress indicated that the ECOA must be construed broadly to effectuate its purpose of ending discrimination in credit applications,” it continued. “Moreover, other provisions of the ECOA strongly confirm that discouraging applications for credit constitutes a violation of the statute. When Congress amended its civil liability provision so that the regulatory agencies responsible for enforcing the ECOA would be required to refer a case to the attorney general whenever the agency believed a creditor ‘has engaged in a pattern or practice of discouraging … applications for credit in violation of section 1691(a) of this title,’ Congress thus confirmed that discouraging an application for credit is a violation of the ECOA.”

The court emphasized Congress’ intention to prevent circumvention and evasion, stating this intent made clear that discouragement as prohibited by ECOA must include discouragement of prospective applicant.

“The term ‘applicant’ cannot be read in a crabbed fashion that frustrates the obvious statutorily articulated purpose of the statute,” the court determined. “Indeed, the ECOA’s scope of prohibition prohibits discrimination ‘with respect to any aspect of a credit transaction.’ Congress well understood that ‘any aspect of a credit transaction’ had to include actions taken by a creditor before an applicant ultimately submits his or her credit application.”

Accordingly, the appellate court reversed the district court’s decision to dismiss the case, and remanded it for proceedings consistent with the appellate opinion.

Parties’ response

RESPA News reached out to the bureau’s attorney who was assigned to the case. In response, the bureau directed the publication to CFPB Director Rohit Chopra’s X (formerly known as Twitter) account.

“The CFPB is working hard to root out violations of longstanding federal laws that prohibit discrimination in lending,” Chopra’s two-thread X post stated. “[A]n appellate court issued an important decision in favor of the CFPB, making clear lenders cannot discriminate against prospective applicants by discouraging them from applying for loans.”

Following up an email from RESPA News, Garris Horn, LLP co-Managing Partner Richard Horn, part of Townstone’s legal team, said the team was disappointed in the appellate court’s decision, noting the opinion didn’t really respond or engage with Townstone’s arguments.

“For example, it doesn’t address the Supreme Court case Board of Governors of Federal Reserve System v. Dimension Fin. Corp., which found that the same general rulemaking authority the CFPB is relying on in Townstone only allowed the Board to ‘police within the boundaries of the act’ and not to ‘expand its jurisdiction beyond the boundaries established by Congress,’” Horn said. “It’s very surprising that they did not even deal with this Supreme Court precedent. 

“They also didn’t grapple with the circuit court opinions in Regions Bank or Hawkins, both of which address the issue of whether ECOA’s rulemaking delegation allows extending beyond ‘applicants,’ to which those circuit courts said no,” he further explained. “As we briefed the court, if the CFPB argues that the Regulation B anti-discouragement provision is an attempt to reach circumvention or evasion, then so is the Regulation B provision extending ECOA to guarantors. Both regulatory provisions try and do the same thing, go beyond ‘applicant’ to address something the statute did not.”

The appellate court also had to side-step its own precedent in Moran Foods to do this, Horn added. As to the application of Loper Bright, he observed the Seventh Circuit may have implied the CFPB has unlimited discretion under its general rulemaking delegation, “which cannot be the law, and also didn’t address how this necessarily tramples on free speech.” 

“This is not the end of the fight,” Horn said. “We are evaluating our appeal options right now, which includes filing a petition for cert in the Supreme Court.

“We are most disappointed for our client, who has been dealing with this CFPB overreach since 2017.”