An Illinois district court was asked in Bureau of Consumer Financial Protection Bureau v. Townstone Financial, Inc., No. 20-CV-4176 (N.D. Ill. Feb. 3, 2023) whether the Equal Credit Opportunity Act (ECOA)’s prohibitions in connection with consumer credit applications extends to prospective applicants who have not yet applied for credit. Specifically, the issue was whether a regulation prohibiting conduct discouraging applicants and or prospective applicants from making or pursuing an application for credit improperly attempts to expand the ECOA’s reach beyond the express and unambiguous language of the statute. The court found that it did.
This suit was brought by the Consumer Financial Protection Bureau (CFPB) a federal agency with authority to enforce the ECOA, among other laws. The defendants are a mortgage broker/lender, and its owner, (Creditor), that operates in several states but mostly in the Chicago-Naperville-Elgin Metropolitan Statistical Area (Chicago MSA).
According to the complaint, starting as early as 2014, the Creditor marketed its services through a weekly radio show led and a podcast by the Creditor’s owner which reached the entire Chicago MSA. The show was available on-line and streamed on several social media sites. The format of the show had the hosts discuss mortgage-related issues and take questions from prospective applicants. The show allegedly included statements and opinions from the hosts that would discourage African-American prospective applicants from applying for mortgage loans from the Creditor; mainly making disparaging remarks that specific neighborhoods that are predominantly African-American are dangerous and unruly.
Despite African-Americans making up 30% of the population of Chicago, the Creditor allegedly did not target any marketing toward African-Americans in the Chicago MSA. Also, based on Home Mortgage Disclosure Act data from 2014 through 2017, of the applications it drew during that period less than 1.5% were from African-American applicants. It drew less one percent of applications from properties located in high-African-American neighborhoods, even though such neighborhoods made up 13.8% of the Chicago MSA’s census tracts. While the Creditor drew between 1.4%, and 2.3% of its applications for properties in majority-African-American neighborhoods during this period, Creditor’s peers drew many times more.
The CFPB brought suit under ECOA’s prohibition on discriminating on the basis of race in regard to a credit transaction. Specifically, it alleged the Creditor violated its implementing regulations, known collectively as Regulation B, which 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.”12 C.F.R. § 1002.4(b). The CFPB alleged the Creditor’s acts and practices would discourage African-American prospective applicants, as well as prospective applicants in majority- and high-African-American neighborhoods in the Chicago MSA from seeking credit, in violation of Regulation B and the ECOA.
The Creditor moved to dismiss arguing that the CFPB’s interpretation of Regulation B improperly attempted to expand the ECOA’s reach beyond the express and unambiguous language of the statute. While the ECOA regulates behavior towards applicants for credit, the Creditor argued, it does not regulate any behavior relating to prospective applicants who have not yet applied for credit. The district court agreed and dismissed the complaint with prejudice.
The district court framed the issue as whether the CFPB’s interpretation that Regulation B’s longstanding discouragement prohibition applies to prospective applicants is a permitted interpretation of the ECOA. In approaching this inquiry, the court applied the two-step framework set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)). The first step of Chevron was to determine “whether Congress has directly spoken to the precise question at issue.” If it has spoken to the precise question at issue “unambiguously,” then “that is the end of it: the agency and courts alike are bound by what Congress wrote.” However, if Congress has “not spoken clearly,” the court moves on to step two, in which the court “consider[s] whether the agency’s interpretation reflects a permissible construction of the statute.”
For the step-one inquiry, the district court looked to the text of the ECOA to determine whether the statute prohibits discouragement of prospective applicants on the basis of race. It noted that the ECOA prohibits discrimination “against any applicant” and that “applicant” is defined to mean “any person who applies to a creditor directly for an extension, renewal, or continuation of credit…”. The court found this language to clearly and unambiguously prohibit discrimination against applicants, which the ECOA clearly and unambiguously defines as a person who applies to a creditor for credit. As such, prospective applicants were not covered by the ECOA.
The question was not decided solely on ECOA’s definition but on the fact that the word “applicant” is used twenty-six times in the statute, and the statute does not prohibit or discuss any conduct prior to the filing of an application. The court acknowledged the CFPB’s interpretive authority is broad but said it cannot re-write the statute. The CFPB cannot regulate outside the bounds of the ECOA, and the ECOA clearly marks its boundary with the term “applicant.” As such, Congress has directly and unambiguously spoken on the issue and has only prohibited discrimination against applicants. As such, under Chevron the court said it did not need to move on to the second step.
The court noted its conclusion was also supported by Seventh Circuit authority which found that the ECOA was inapplicable where the plaintiff was only a guarantor. The Seventh Circuit in Moran Foods, Inc. v. Mid-Atlantic Market Development Co., LLC, 476 F.3d 436 (7th Cir. 2007) held that while the Federal Reserve Board had defined “applicant’ for credit” to include a guarantor, it did not have to defer to that interpretation because there was nothing ambiguous about “applicant” in the statute and there was no way to confuse an “applicant” with a “guarantor”.
The court also said the CFPB attempted to skirt the Chevron framework by emphasizing the broad language of the delegation provision of the ECOA which suggests that the CFPB was given rulemaking carte blanche under the statute, citing Mourning v. Fam. Publ’ns Serv., Inc., 411 U.S. 356 (1973). In Mourning the Court looked to the broad delegation of authority given to the regulator under the delegation provision of the Truth in Lending Act. The Court noted that the delegated authority was both a general grant of authority to promulgate regulations designed to carry out the purposes of the act, as well as allowing regulations that may define classifications and exceptions to ensure compliance with the act. “Under the applicable precedent at the time, where an empowering provision of a statute, like Section 105, gave the agency the power to make such rules and regulations as may be necessary to carry out the act, the validity of a regulation promulgated under such an empowering provision would be sustained, so long as it was ‘reasonably related to the purposes of the enabling legislation.’”
The CFPB argued that under the Mourning decision the anti-discouragement provision of Regulation B must be sustained, so long as it is reasonably related to the ECOA’s objectives. The district court rejected this argument holding that the two-step Chevron framework cannot be ignored. The Court joined numerous other courts in declining the invitation to bypass Chevron by way of Mourning and further stated that Mourning’s application belongs, if anywhere, in Chevron step two.
In sum, because the language in ECOA clearly and unambiguously prohibit discrimination against applicants, prospective applicants like those identified by the CFPB were not covered by ECOA.
Author
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Jim is a founding partner of Noonan & Lieberman. Jim has more than 25 years of experience in civil litigation on behalf of creditors, servicers, business and real estate owners.
