During July 2020, the Consumer Financial Protection Bureau (CFPB) filed its first redlining complaint against a nonbank mortgage company, Townstone Mortgage (Townstone), under the Equal Credit Opportunity Act (ECOA) and Consumer Financial Protection Act (CFPA). The US District Court for the Northern District of Illinois recently granted Townstone’s motion to dismiss the CFPB’s complaint on the grounds that the ECOA applies to applicants and not to prospective applicants. The court ruled in favor of the position long maintained by mortgage and other credit industry participants that a redlining claim may not be brought under the ECOA because the statute only applies to applicants.
While the ECOA only refers to applicants, Regulation B provides 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.” The CFPB argued that the court should follow Regulation B, and should defer to its interpretation of the ECOA reflected therein because the regulation is “reasonably related” to the objectives of the ECOA. The court rejected that argument.
During 2022 the CFPB revised its unfair, deceptive, or abusive acts or practices (UDAAP) examination manual to provide that discrimination is covered by the unfair element. The CFPB directed its examiners to apply the CFPA’s unfairness standard to conduct considered to be discriminatory whether or not it is covered by the ECOA. Will the CFPB attempt to use this theory against Townstone?
The US Department of Housing and Urban Development (HUD) and the US Department of Justice (DOJ) have the authority to bring claims under the Fair Housing Act (FHA). During October 2021 the DOJ announced a major initiative to combat redlining. The FHA has language that differs very much from the language in the ECOA. Will HUD or DOJ pick up the case against Townstone?
The CFPB’s next step is not clear at present. Will they challenge this ruling by appealing to the US Court of Appeals for the Seventh Circuit? Will they use UDAAP powers against Townstone? Will HUD or DOJ get involved?