On February 3, 2023, the Northern District of Illinois (“the Court”) issued an important opinion in the matter of Bureau of Consumer Financial Protection v. Townstone Financial, Inc. and Barry Struner, No. 20-cv-4176, LEXIS 18405 (N.D. Ill., Feb. 3, 2023), addressing the longstanding discrepancy between the congressionally-approved language of Equal Credit Opportunity Act (“ECOA”) section 1691(a), which provides that the ECOA applies only to “applicants,” and the agency promulgated “Regulation B,” which seemingly expands the ECOA’s reach to both “applicants” and “prospective applicants,” ultimately resolving the disparity by holding that the ECOA’s scope is limited only to actual credit applicants.

The ECOA and “Regulation B”

The ECOA was passed by Congress in 1974 with the intent to remediate and prevent creditor discrimination, providing that it is “unlawful for any creditor to discriminate against any applicant with[] respect to any aspect of a credit transaction . . . on the basis of race, color, religion, national origin, sex[,] marital status, or age.”  15 U.S.C. § 1691(a) (emphasis added).  In 1975 various non-congressional ECOA enforcement regulations were created by the Federal Reserve Board, among them the so-called “Regulation B” found at 12 C.F.R. § 1002.4(b), which seemingly expanded ECOA’s scope by providing that 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.”  (emphasis added).

Background

It is against this legal backdrop that this matter unfolded, involving Townstone Financial, Inc. (“Townstone”), a Chicago-based mortgage broker/lender that conducted the vast majority of its business within the Chicago-Naperville-Elgin metro area (“Chicago MSA”).  In 2014, Townstone began advertising its services via its own AM radio show – the eponymous “Townstone Financial Show” – which post-airing was converted into podcast form and disseminated on the internet.  The format of the show involved hosts, who were self-proclaimed “Chicago real-estate experts,” examining various hot-topic mortgage and lending-related issues and fielding on-air calls.

Shortly after the show’s commencement, Townstone was accused of issuing problematic statements discouraging prospective African-American mortgage applicants from applying for a loan, with these statements including: (1) a host, when discussing a city with an 80.3% African-American population, stating that when you drive through the city “[y]ou drive very fast . . . and you don’t look at anybody or lock on anybody’s eyes. . . .  You look at your dashboard, you don’t lock on anybody”; (2) the hosts stating that listeners looking to sell their homes should discard their Confederate flags; and (3) the hosts stating that Friday through Monday in South Side Chicago was “hoodlum weekend.”

Beyond these controversial statements, Townstone’s lending data also demonstrated that while it had received 2,700 total mortgage applications between 2014 and 2017, only 37 of these applications were from African-Americans in the Chicago MSA region where Townstone conducted the majority of its business.

In July 2020, the Bureau of Consumer Financial Protection (“CFPB”) – a federal agency tasked with independently enforcing the ECOA – filed suit with the Court, alleging that Townstone’s statements had violated the ECOA by triggering Regulation B’s prohibition against discouraging prospective applicants from seeking out mortgages.  In response, Townstone moved to dismiss the Complaint on the basis that the CFPB was attempting to impermissibly expand the ECOA’s reach beyond its original congressional intent, as the express language of the statute limited its application only to parties who had actually applied for credit.

ECOA held inapplicable to prospective applicants

To resolve this dispute, the Court was required to settle the “question of whether the [CFPB]’s interpretation of [Regulation B] is one that [the] ECOA permits.”  It did so by looking to the text of the ECOA using the two-step framework issued by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984), beginning under step-one by examining 15 U.S.C. § 1691(a) and the corresponding definitions in section 1691a(b) to ascertain whether “Congress ha[d] directly spoken to the precise question at issue.”  The Court found that Congress had done so, holding the plain text of the ECOA “clearly and unambiguously prohibit[ed] discrimination against applicants, which the ECOA clearly and unambiguously define[d] as a person who applies to a creditor for credit.”  The Court thus held that “Congress ha[d] directly and unambiguously spoken on the issue at hand” and there was, therefore, no need to “move on to the second step of the Chevron analysis because it is clear that the ECOA does not apply to prospective applicants.”

The Court continued on to provide ample case law supporting its interpretation, and further opined concerning the CFPB’s authority and capacity to enact regulations, which the Court observed was “not limitless.”  The Court found that Regulation B overstepped the CFPB’s grant of authority, as the ECOA’s “entire statutory scheme revolves around applicants” and “the statute does not prohibit or discuss conduct prior to the filing of an application.”  The Court found that the CFPB was impermissibly attempting to “regulate outside the bounds of the ECOA, [despite] the ECOA clearly mark[ing] its boundary with the term ‘applicant.’”

Of interesting note, while the CFPB put forth case law in which its interpretation of Regulation B had been upheld or relied upon, the Court swept these authorities aside without consideration, holding that a court’s prior reliance on a regulation or statute “when the validity of that regulation [or statute] [was] not [in] dispute” was wholly inapplicable to the Chevron interpretation question currently before it and required no deference.

Thus, the Court granted Townstone’s motion, holding that it could “only defer to an agency’s interpretation . . . no matter how laudable its purpose, when [the interpretation] survives the two-step Chevron framework.  The [] provision of Regulation B with respect to ‘prospective applicants’ does not survive Chevron step one, [and] so the Court does not defer to the CFPB’s interpretation.”  Therefore, as the “CFPB [could] not amend its pleading in a way that would change the language of the ECOA,” dismissal with prejudice was warranted.

Takeaways

The potential application of this holding is important and far-reaching, as Regulation B has been in existence for many years and the inconsistency between the regulatory language and the ECOA’s direct provisions has been an oft-litigated issue in all districts.  This decision and holding provides a solid basis to argue in any district (as Chevron is universal) that the ECOA’s protections cannot be extended to prospective applicants.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, James Mazewski at jmazewski@riker.com, Kevin Hakansson at khakansson@riker.com or Kori Pruett at kpruett@riker.com.