Appeals Court Gives CFPB Major Victory in Townstone Border Crossing Case

A federal appeals court has ruled that the Consumer Financial Protection Bureau has broad authority to discourage discrimination in order to combat redlining, a major victory for the bureau in a contentious case, CFPB vs. Townstone Financialagainst a Chicago mortgage lender.

A three-judge panel of the U.S. Court of Appeals for the 7th Circuit ruled that the Equal Credit Opportunity Act applies not only to credit applicants but also to potential applicants.

The CFPB filed a redlining lawsuit against Townstone Financial in 2020, alleging that the company’s CEO Barry Sturner made derogatory comments about black people in a radio ad that discouraged minorities from applying for mortgages. At issue in the case was whether Sturner discouraged potential black applicants from applying for mortgages with Townstone, in violation of ECOA and Regulation B — which prohibits lenders from discriminating on the basis of sex, race, color, religion, national origin, age, or marital status.

The justices said Congress had indicated the statute should be interpreted broadly to eliminate discrimination in credit applications.

“An analysis of the text of the ECOA as a whole clearly shows that it prohibits not only overt discrimination against credit applicants, but also discouraging potential applicants from applying for credit,” the judges wrote. in a 15-page opinion“When the text of ECOA is read as a whole, it is clear that Congress has authorized the imposition of liability for discouraging potential applicants. The prohibition on discouraging potential applicants contained in Regulation B is therefore consistent with the text and purpose of ECOA.”

The Consumer Financial Protection Bureau (CFPB) cited evidence of discrimination that Sturner made in a radio ad in which he appeared. described the Jewel-Osco grocery store as a “jewel in the jungle,” and declared the South Side of Chicago from Friday to Monday as “hooligan weekend.”

The CFPB identified five instances in which Sturner and other landlords made statements that discouraged potential black applicants from applying for mortgages. Additionally, the bureau said that between 2014 and 2017, Townstone received fewer mortgage applications from black applicants, fewer mortgage applications for properties in neighborhoods with large black populations, and fewer mortgage applications for properties in neighborhoods with majority black residents.

Last year, the United States District Court for the Northern District of Illinois dismissed the case in favor of Townstone focusing on the ECOA definition of a loan applicant. The lower court also rejected the CFPB’s argument that its enforcement and regulatory authority allowed it to prohibit the disincentive of potential applicants. The CFPB appealed.

“The district court held that ECOA does not authorize the imposition of liability for discouraging potential applicants. We disagree,” the judges wrote.

“The term ‘applicant’ cannot be construed in a way that defeats the statute’s clear, statutory purpose,” the justices wrote. “Indeed, the scope of the ECOA prohibition prohibits discrimination ‘with respect to any aspect of a credit transaction.’”

The case was dismissed and referred to the district court.

“Discouraging applicants is the first tool in the redlining playbook. A discriminatory lender might think that using a ‘Whites Only’ sign is the best way to achieve their goal,” said Adam Rust, director of financial services at the Consumer Federation of America. “I think it’s common sense to read the law and come to that conclusion.”

The CFPB did not immediately respond to a request for comment.

The Pacific Legal Foundation, an organization representing Townstone, argued that Sturner is protected by the First Amendment.

“We are disappointed with the decision, which offered only a cursory analysis of the relevant statutes and completely ignored Townstone’s First Amendment arguments,” the public interest law firm said in a statement. “We are considering our options for further review.”

Experts say Townstone could appeal the case to the full Seventh Circuit Court or to the Supreme Court.