On July 11, 2024, the United States Court of Appeals for the Seventh Circuit issued its highly anticipated decision in Consumer Financial Protection Bureau v. Townstone Financial, Inc., et al. In this pivotal decision, the Seventh Circuit reversed a prior ruling from the United States District Court for the Northern District of Illinois and held that liability under the Equal Credit Opportunity Act (ECOA) extends to prospective applicants – namely to individuals who have not submitted an application for credit but may be considering or in the process of applying for credit. This holding represents a major departure from the prior Townstone decision, which utilized a plain text reading of ECOA to determine that Congress intended to limit the scope of this law to discrimination of “applicants” and not “prospective applicants” for credit.

The Consumer Financial Protection Bureau (CFPB) filed the underlying lawsuit in July 2020 against mortgage lender Townstone Financial, Inc. and its co-founder, Barry Sturner. The CFPB alleged that Townstone and Sturner discouraged black prospective applicants from applying for mortgage loans by making several disparaging statements on a commercial advertisement radio show in violation of ECOA, Regulation B, and the Consumer Financial Protection Act. The CFPB also alleged that statistical analyses of Townstone’s mortgage-loan applications reflected disparities between Townstone and its peers in receiving mortgage-loan applications for properties in majority black neighborhoods in the Chicago Metropolitan statistical area. The United States District Court for the Northern District of Illinois granted Townstone’s motion to dismiss the complaint, holding that ECOA does not authorize the imposition of liability for the discouragement of prospective applicants, and that “the ECOA clearly marks its boundary with the term ‘applicant.’”

Relying on the broad authority delegated to the CFPB to carry out the ECOA’s purpose, the Seventh Circuit overturned the district court’s ruling, granting the CFPB a significant victory. The Seventh Circuit noted statutory language that delegated authority to the CFPB to enact regulations “necessary or proper to effectuate the purposes” of the ECOA. The Seventh Circuit also noted language within the ECOA requiring its enforcing regulatory agencies to refer matters “to the Attorney General whenever the agency has reason to believe that 1 or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit…” The Seventh Circuit also focused on ECOA’s use of the term “discouraging” in reasoning that Congress intended to include discouraging an application for credit as a violation of the ECOA. As a result of this analysis, the Seventh Circuit held that when the text of ECOA is read as a whole, “it is clear that Congress authorized the imposition of liability for the discouragement of prospective applicants.”  

Townstone may appeal the Seventh Circuit’s decision to the United States Supreme Court, potentially shaping the future of fair lending liability and regulatory enforcement practices. Townstone’s time to seek certiorari from the Supreme Court will not expire until October 2024. 

From a practical perspective, this decision raises a number of issues for the consumer financial services industry – particularly for those extending loans to consumers:

• This decision represents the first decision by a U.S. Court of Appeals weighing in on the issue as to whether the ECOA extends to “prospective applicants.” It bears watching as to whether other courts nationwide are asked to make rulings on this issue, and if so, whether other appellate courts take divergent positions on this issue. That sort of “circuit split” would increase the chance that the Supreme Court eventually reviews this issue.

• This decision is particularly noteworthy considering the political climate. Beginning in October 2022, the Biden administration, including the Department of Justice and other federal regulators, announced the “Combatting Redlining Initiative” whereby multiple federal entities combined forces to enforce the ECOA and other fair housing laws in a markedly more aggressive way than had been the prevailing practice. This initiative has led to at least 10 redlining enforcement actions, with multiple significant settlements during this time, and many more investigations are currently pending with the DOJ. We would expect this decision to embolden federal regulators and the DOJ to move forward with their redlining enforcement efforts under the ECOA.

• It is notable thatthis decision was issued mere weeks after the Supreme Court overturned Chevron in Loper Bright Enterprises v. Raimondo and redefined the manner in which federal agency decisions are to be reviewed by courts. The underlying decision from the district court here relied on the “test” underlying Chevron­ in order to avoid providing deference to the CFPB’s interpretation of the ECOA. While the Seventh Circuit did reference Loper Bright in a footnote and explicitly stated it was reviewing the statutory interpretation question presented in this case on the newly required de novo basis, the decision reads like one that was written to follow the now-overturned deference provided to regulator decisions under Chevron. It bears watching whether the evolution of Loper Bright in guiding judicial review of regulatory decisions in the financial services space will be more similar to the deferential treatment apparently provided by the Seventh Circuit in Townstone, or whether future decisions will take a different approach where the underlying briefing will more forcefully argue statutory interpretation under the de novo review standard.

• In the event the Supreme Court does not accept review of the Court of Appeals’ decision, the lower court will be tasked with determining additional questions of law that might provide additional significant precedent in this area. The Seventh Circuit, in remanding this case, noted that Townstone argued that Regulation B is invalid facially, and as applied to Townstone’s speech on its radio show, in violation of the First Amendment. The trial court never ruled on this issue in light of its dismissal on other grounds. As a result, industry observers will be following this case closely with respect to the First Amendment issue.

Notwithstanding all of these issues, the Townstone decision demonstrates that enforcement in fair lending, especially with respect to redlining claims, remains a significant concern for the consumer financial services industry. Lenders should continue to assess their current policies and practices – in particular advertising and lending practices – to ensure they are not engaging in discrimination against prospective applicants and are in compliance with the ECOA and Regulation B.