CFPB’s authority affirmed in appeal against Townstone Financial

The Consumer Financial Protection Bureau (CFPB) has broad authority under the Equal Credit Opportunity Act (ECOA) to prohibit discrimination against credit applicants and from discouraging prospective applicants for credit.

This reinforces the bureau’s enforcement authority as it wages a war against redlining, including in a case against Chicago-based Townstone Financial, according to court documents reviewed by HousingWire.

In the summer of 2020, the CFPB filed suit against Townstone, alleging that it violated Regulation B of the ECOA by drawing “almost no applications for properties in majority-African-American neighborhoods located in the Chicago-Naperville-Elgin Metropolitan Statistical Area (Chicago MSA) and few applications from African Americans throughout the Chicago MSA.”

This amounted to discrimination, the CFPB alleged. That October, Townstone moved to have the case dismissed. A federal judge in Illinois ruled in favor of Townstone in February 2023, but the CFPB vowed to appeal. The bureau sought a review of the decision in the U.S. Court of Appeals for the Seventh Circuit.

After more than a year of briefs and oral arguments, a three-judge panel for the appeals court ruled in favor of the CFPB on Thursday.

“The district court held that the ECOA does not authorize the imposition of liability for the discouragement of prospective applicants,” the decision stated. “For the reasons set forth in the following opinion, we take a different view.”

In a statement provided to HousingWire, Steve Simpson of the Pacific Legal Foundation — who is representing Townstone in this case — expressed disappointment in the decision but said the organization will continue to find a path forward.

“We’re disappointed with the court’s decision, which didn’t grapple with our many statutory arguments,” Simpson said in an email. “And regardless of the statutory problems with regulation B, the CFPB’s suit against Townstone is a flagrant violation of the First Amendment. We are considering what steps to take next, but Townstone’s defense of CFPB’s regulatory overreach is far from over.”

The panel went on to say that the ECOA vested sufficient authority in the Federal Reserve Board — and later, after the Dodd–Frank Wall Street Reform and Consumer Protection Act, in the CFPB — to enforce ECOA in this way.

“An analysis of the text of the ECOA as a whole makes clear that the text prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit,” the decision reads. “Congress vested the Board (and later the Bureau) with the authority to issue regulations ‘necessary or proper to effectuate the purposes of this title’ or ‘to prevent circumvention or evasion thereof.’”

The panel continued by saying that the intent of Congress upon the passage of ECOA was for the authority to be broad in its enforcement.

“Congress indicated that the ECOA must be construed broadly to effectuate its purpose of ending discrimination in credit applications. Moreover, other provisions of the ECOA strongly confirm that discouraging applications for credit constitutes a violation of the statute,” the decision said.

HousingWire reached out to representatives of the CFPB but did not immediately receive a response.