The legal team defending Townstone Financial, a small non-bank mortgage lender in Chicago, filed its brief in the U.S. Court of Appeals for the Seventh Circuit. The filing is the most recent in the saga that began in 2017, when the Consumer Financial Protection Bureau (CFPB) sent Townstone’s owner Barry Sturner a civil investigative demand under suspicion of violating the Equal Credit Opportunity Act (ECOA).
“The use of selective and self-serving allegations by a government agency without any evidence is disturbing,” Marx Sterbcow, managing attorney at the Sterbcow Law Group, LLC and one of the attorneys representing Townstone, told RESPA News in an email. “But when you add into the mix the same government agency expanding their authority by implementing their own laws outside of congressional authority, well, that petrifies everyone.”
The Townstone case is one of the first of its kind in a federal court. For years, the CFPB and other agencies used the anti-discouragement provision in Regulation B, ECOA’s implementing statute, to address a sort of modern-day redlining. Under this theory, it is unlawful for a creditor to “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.”
U.S. District Court Judge Franklin Valderrama in the Northern District of Illinois, Eastern Division, 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.
“Judge Valderrama appropriately looked to the text of the statute and saw that ‘applicant’ was defined by Congress when they passed this law in 1974,” Jessica Thompson, an attorney at the Pacific Legal Foundation and part of Townstone’s legal team, told RESPA News in the days after the dismissal. “[T]hey used the word ‘applicant’ over two dozen times throughout the statute, and not once does ‘prospective applicant’ appear.
“And so, there was no statutory ambiguity, and there was no need to defer to the agency,” she added. “The Supreme Court has indicated a reluctance to grant Chevron deference to agencies. But we haven’t seen that trend continue as prominently through the district courts and the courts of appeals.”
The CFPB appealed Valderrama's dismissal to the appellate court in the Seventh Circuit, arguing ECOA authorizes its enforcing agency to enact regulations to further the statute’s purpose.
“[D]iscouraging consumers on a protected basis (like their race, sex, or religion) from applying for credit would plainly frustrate ECOA’s purpose of prohibiting credit discrimination,” the bureau argued. “Moreover, in 1991, Congress expressly recognized that discouraging applications for credit violates ECOA.”
The bureau further stated it believed Valderrama’s reliance on Chevron was incorrect, because Congress expanded the scope of ECOA to purposely include prospective applicants.
“From the start, ECOA has directed the implementing agency to issue regulations that ‘in the judgment of the [agency] are necessary or proper to effectuate the purposes of this subchapter, to prevent circumvention or evasion thereof, or to facilitate or substantiate compliance therewith,’” the bureau’s brief stated. “This language sufficed to give the board the authority to issue Regulation B in 1975 – and then to re-issue it (in 1977) when Congress expanded the scope of ECOA.
“After all, discouraging prospective applicants from applying (on a prohibited basis) is a straightforward evasion of the text of § 1691(a) and would frustrate the statute’s purpose of ‘requir[ing] that financial institutions and other firms engaged in the extension of credit make that credit equally available to all creditworthy customers without regard to [prohibited characteristics].’”
Should the appellate court not come to the same conclusion, the bureau stated it should still prevail because even if ECOA’s text does not unambiguously authorize Regulation B’s prohibition on discouraging prospective applicants, it does not forbid it. By not recognizing the fact Congress made clear through a referral provision that “discouraging…applications for credit” violates ECOA and concluding ECOA’s reference to applicants was evidence of Congressional intent to exclude prohibiting prospective applicants, the lower court erred.
“The text of the statute, along with the context of the statute (e.g., its relationship to [the Truth in Lending Act]), demonstrate[s] that the term ‘applicant’ does not preclude a prohibition on discouragement of prospective applicants,” the bureau stated. “Indeed, numerous courts have recognized that the term can encompass individuals who have not submitted an application for credit.”
However, Townstone’s brief challenged this interpretation, arguing the anti-discouragement rule goes beyond the objective actions of a creditor to the subjective reaction of a listener of the creditor’s advertisements.
“Discrimination can be proved with facts,” Townstone’s brief stated in its criticism of the CFPB’s application of the rule. “‘Discouragement’ turns on feelings. Nothing in the rule requires that the creditor’s speech be connected to race or convey an intention not to do business with anyone. And it is up to the creditor to figure out what it means for someone to be ‘discourage[ed] on a prohibited basis.’
“Most significantly, the relevant listener need not be an applicant, or have any connection with the creditor, or even be a known individual,” it added. “A creditor can violate the rule by making any statement that a ‘prospective’ – i.e., future – ‘applicant’ might hear that ‘would discourage a reasonable person on a prohibited basis’ from seeking credit.”
Under the bureau’s interpretation, a company could be held liable for talking about the crime rate of a certain area as long as a “prospective applicant” might hear them, Townstone argued. Even if Townstone “disparaged” people from minority communities (which it denies doing), the rule does not prohibit disparagement – it requires the applicant be “discouraged” from seeking credit.
Townstone further contended the CFPB’s arguments that ECOA’s rulemaking delegation authorized it to amend ECOA to further the statute’s purpose, and that Congress endorsed the anti-discouragement rule by directing agencies to refer matters to the attorney general when they believe there is a pattern and/or practice of discouraging applicants on a protected basis, run counter to Chevron, which requires there to be a “gap” in the legislation for the agency to fill.
“Congress [leaves room] either by expressly directing an agency to fill a specific gap in a law or by leaving terms ambiguous,” Townstone stated. “Section 1691b(a), however, is simply a general grant of rulemaking authority. Such a grant is necessary for an agency to have any power to issue rules, but, standing alone, it does not even get an agency to Chevron step two. And because section 1691(a) is unambiguous, the district court was correct to end its analysis at Chevron step one.
“CFPB’s second argument fails because section 1691e(g) makes clear that, whatever ‘discouraging and denying applications’ means, it must qualify as a violation of 1691(a),” it added. “As noted, the anti-discouragement rule sweeps far more broadly than section 1691(a) allows. Rejecting someone who requests credit because of their race, however, is a violation of 1691(a). One could call such a rejection ‘discouragement’ – and that is a sensibly broad term to use in a section whose purpose is to direct an agency to refer suspected violations to [the Department of Justice] – but it would also be discrimination in violation of section 1691(a).
“Again, ‘applicant’ means one who requests credit. It does not refer to hypothetical persons who imagine one day requesting credit. Reading 1691e(g) to refer to things that actually violate section 1691(a) comports with the language of ECOA and is consistent with the legislative history.”
Richard Horn, co-managing partner at Garris Horn and another member of the Townstone legal team, told RESPA News: “The CFPB is attempting to enforce outside the bounds of its authority under ECOA, and in the process also violate Townstone’s First Amendment rights. This brief shows the court why the district court got it right when it dismissed the CFPB’s case. Although the CFPB doesn’t seem to understand this, the CFPB cannot just make up its own laws. There are limits to its authority.
“The industry should also take note that this case has larger implications,” he added. “For one, this case could affect the government’s ability to use this ‘modern day redlining’ theory under the CFPB’s small business loan data collection rule. That rule creates an HMDA-like data set for small business loans, which the government would surely like to use to bring similar claims involving small business lending.
“Also, because the CFPB is relying on its general rulemaking authority under ECOA to support its action, this case also has implications for other CFPB attempts to expand beyond its statutory bounds under its other statutes using similar general rulemaking authority.”
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