Post-Chevron World Preview: Seventh Circuit Upholds Regulation B’s Dissuasion Prohibition as Consistent with ECOA

WITH Loper Bright’s recent fatal blow Chevron Some commentators predict significant reductions in state administration and a narrowing or curtailing of the powers of federal regulatory agencies.

For various reasons, it is certainly too early to tell. The administrative state is vast. There are more than 400 agencies and subagencies in the United States, and Congress enacts laws and delegates authority to agencies to adopt and implement regulations. In many statutory schemes, such as the Equal Credit Opportunity Act (ECOA), Congress grants agencies authority to adopt regulations to carry out the purposes of the laws and gives the executive branch the authority to enforce the regulations.

This can be seen in Consumer Financial Protection Bureau v. Townstone Financial, Inc.decision recently issued by the Seventh Circuit. The court interpreted ECOA all over again and did not refer to the agency’s regulations. In his independent review, he analyzed the statutory scheme and found that the disincentive section of Regulation B is consistent with ECOA. It is an interesting look at the world afterChevron.

City Stone: background

City Stone is a CFPB enforcement action originally filed in 2020 alleging violations of ECOA for statements by Townstone allegedly discouraging potential black applicants from the Chicago area from applying for mortgage loans, citing statements by Townstone’s CEO and senior loan officer on his long-running radio show and commercial podcast, as well as statistics regarding Townstone’s lending to black applicants in Chicago. The CFPB alleges that Townstone’s conduct constituted an improper dissuasion of potential applicants, in violation of Regulation B. It alleges that Townstone’s actions and business practices resulted in fewer black potential applicants applying for loans than would otherwise have been the case.

Regarding City Stone was the “discouragement” prohibition in Regulation B, 12 CFR § 1002.4 (formerly § 202.4(b)). In Regulation B, the Federal Reserve Board (now the CFPB) adopted regulations to carry out the purposes of ECOA. The dissuasion rule prohibits creditors from making statements in advertising or otherwise that would discourage on an impermissible basis “applicants or prospective applicants” from applying for or applying for credit.

The district court dismissed City Stone action in early 2023, ruling that ECOA’s statutory anti-discrimination prohibition applies only to “applicants” and not “potential” applicants. The district court applied the test for Chevron respect, considering the ECOA statutory prohibition as unambiguous and therefore in line with Chevron The first step was to reject the broader scope of the dissuasive provisions in Regulation B covering potential applicants.

Seventh Circuit Decision

The Consumer Financial Protection Bureau (CFPB) appealed, and the Seventh Circuit Court heard oral arguments in the fall of 2023 and issued a decision on July 11, 2024, just weeks after Loper Light decision. Recognition Loper Bright’s in a footnote in which the Seventh Circuit Court of Appeals rejected Chevron’s ruling, stating that it would consider issues of interpretation of the ECOA all over againand did not benefit from the CFPB’s interpretation of ECOA.

The Seventh Circuit found that the dissuasive provision in Regulation B is consistent with the ECOA statutes and Congress’s statutory directives/prohibitions. Considering the text of ECOA “as a whole,” the court found that it prohibits not only “direct discrimination” against credit applicants but also “discouraging potential credit applicants.” The court noted that in ECOA § 1691b(a), Congress granted the agency broad authority to enact regulations to carry out the purposes of ECOA, including regulations “to prevent circumvention or avoidance or to facilitate or justify compliance with them.” The granting of authority to prevent “circumvention or avoidance” indicates that ECOA “must be interpreted broadly to carry out its purpose of ending discrimination in credit applications.”

The Court further found that other provisions of the ECOA “strongly support” that discouraging credit applications violates the ECOA. Congress amended the civil liability provision of the ECOA to require the enforcement regulator to refer a matter to the Attorney General with recommendations for a civil action whenever the regulator has reason to believe that a creditor has engaged in a pattern or practice of discouraging or denying credit applications on a basis that is not permitted under the ECOA. 15 U.S.C. § 1691e(g).

The court found that the power given to regulators “to prevent circumvention or evasion” of the ECOA clearly indicates that the prohibited disincentive must include disincentives to expected applicant and applicant. The court reasoned, “The term ‘applicant’ cannot be construed in a manner that would defeat the stated purpose of the Act.” Furthermore, ECOA prohibits discrimination with respect to any aspect of a credit transaction. This includes actions taken by a creditor prior to the applicant’s final submission of a credit application.

Accordingly, the Court found that the CFPB’s complaint constituted a claim for relief and reversed the dismissal. In remanding the case to the district court, the Court did not issue any ruling on the merits, allowing the case to proceed. Townstone and his attorneys have publicly stated that they will continue to challenge the CFPB’s enforcement action and may seek review of the decision by the Supreme Court.

Key conclusions

A number of conclusions can be drawn from the ruling of the Seventh Circuit Court. City Stone decision.

First, City Stone relates to enforcement actions and is based in part on the broad enforcement authority granted to the regulatory enforcement agency. In a private ECOA action, however, the analysis would be different because only “aggrieved claimants” may sue for violations of ECOA, 15 U.S.C. § 1691e(a). As the courts have noted, ECOA’s regulatory enforcement authority is more expansive than the private right of action authorized by § 1691e.

Second, City Stone has important implications for the CFPB’s fair lending work. The Seventh Circuit affirmed Regulation B’s disincentive provision and found it consistent with ECOA. This is a significant victory for the CFPB because the decision confirmed its legal authority under Regulation B to bring the case in the first place. A contrary result would have weakened the agency’s fair lending authority by invalidating a regulation that had been in place since the 1970s. City Stone The case will be tried on the unlawful deterrence claim and Townstone’s defense, including a First Amendment violation claim.

Third, City Stone reflects broader issues beyond ECOA and fair lending. Namely, it can be an indicator of post-Chevron world. For example:

ECOA’s delegation to agencies to adopt regulations “for the purpose of preventing circumvention or avoidance” is not a one-time grant of authority. Other statutory programs that grant the CFPB authority (e.g., Dodd-Frank, EFTA, RESPA) also broadly grant authority to adopt regulations for various purposes—preventing avoidance, facilitating compliance, carrying out statutory purposes, making adjustments or exceptions, or, in the case of TILA, imposing additional requirements. The CFPB will likely continue to lean toward these broad grants of authority to adopt regulations or interpretations that may appear to stretch or exceed the authorizing statute. And, as in City Stonethe courts will interpret these laws all over again to determine whether the regulations are consistent with the statute because they will no longer be subject to the agency’s interpretation of the statute.
IN City StoneThe Seventh Circuit held that the dissuasiveness provision in Regulation B is consistent with the plain terms of the ECOA. It cited the CFPB’s authority to prevent avoidance and circumvention in support, but it did not discuss the specific parameters of that authority. In future cases, courts may be asked to define the scope of delegated rulemaking authority. They may grapple with questions such as the extent to which an agency may depart in a regulation from the specific statutory provision for the purpose of enforcement generaldelegated purpose in another part of the same statute? Agencies do not have unlimited discretion. Moreover, will courts defer to agency factual findings and policy justifications cited for broad regulations to show that the regulation falls within the agency’s general delegated authority? Loper Light allows you to receive agency interpretations Skidmore respect. But will these justifications have the “power to convince” the courts in practice?
When agencies use their general delegated rulemaking authority to depart from statutory mandates, that departure can benefit industry stakeholders. For example, when the CFPB enacted its amendments to Regulation Z to implement the mortgage market reforms under the Dodd-Frank Act, the CFPB declined to implement certain statutory requirements, using its authority under Section 105(a) of the TILA to prescribe regulations to facilitate compliance or for other specified purposes. One such provision was the ban on mortgage prepayment points and fees under the Dodd-Frank Act. In the final rule on loan originators, the CFPB explained that implementation of the Act would be too disruptive to the mortgage market just a few years after the 2008 financial crisis. Accordingly, the agency’s delegated authority can be exercised in departure from the Act’s mandate to adjust or ease regulatory burdens and thereby serve the industry.

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