Federal Court Rejects CFPB’s Attempt to Expand ECOA’s Reach, Dismisses Townstone Complaint

On February 3, 2023, the U.S. District Court for the Northern District of Illinois issued an opinion dismissing the CFPB’s complaint for violations of ECOA against mortgage lender Townstone Financial, Inc.  The CFPB’s Complaint, filed in 2020, had alleged violations of ECOA based on comments made by the company on local radio stations which the Bureau alleged discouraged prospective minority applicants from applying to the lender.  The Bureau’s allegations relied on ECOA’s implementing regulation, Regulation B (12 C.F.R. 1002.4(b)), which prohibits creditors from making any statements “to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” 

The Company filed a motion to dismiss, arguing in relevant part that the ECOA statutory language applies only to “applicants”, and therefore the regulatory language extending the prohibition to “prospective applicants” was improper and not enforceable.  In its opinion, the Court largely adopted this reasoning, finding that the statutory language unambiguously refers only to “applicants,” and does not reference “prospective applicants.”  The Court performed an analysis under the Supreme Court case Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., to determine whether the Court must defer to the Bureau’s interpretation of the statute.  Under Chevron’s two-step analysis, if the statutory term or provision is unambiguous, the Court cannot defer to an agency’s interpretation, and so it does not reach step two of the test.  Therefore the Court’s determination that ECOA unambiguously applies only to “applicants” foreclosed the Bureau’s interpretation. 

The Court did not address any other substantive issues raised by the parties, as this decision on the statute’s terms and application required the Court to grant the motion to dismiss, and foreclosed the need for the Court to address any other argument.  The Court dismissed the complaint with prejudice, meaning that the Bureau cannot amend the Complaint.  The Bureau has the option to appeal this ruling to the U.S. Court of Appeals for the Seventh Circuit. 

While this opinion is a setback for the Bureau in its attempt to broaden ECOA’s applicability, this ruling does not prevent the CFPB from promoting its ECOA-redlining theory in either administrative actions or other courts.  It is also important to note that other laws may apply, including the Fair Housing Act, and that other agencies have broader fair lending enforcement authority than the CFPB.  Last summer, the DOJ, the CFPB, and an independent mortgage company entered into a settlement agreement for allegations of unlawful redlining under both the Fair Housing Act and ECOA.  The DOJ has entered into at least two additional redlining settlements since then as well, one of which was announced last month.

WBK previously covered the CFPB’s filing of this Complaint, which you can read here.