On July 15, 2020, the CPFB filed a complaint in federal court against Townstone Financial, Inc. (Townstone) representing the first ever redlining complaint against a non-bank mortgage lender. The complaint is brought under the Equal Credit Opportunity Act (ECOA) and Consumer Financial Protection Act (CFPA), but not the Fair Housing Act (FHA). (The U.S. Department of Housing and Urban Development (HUD) and U.S. Department of Justice (DOJ), but not the CFPB, have authority to enforce the FHA.)
The complaint in general asserts that during the period of January 1, 2014 through December 31, 2017 (the “relevant period”), Townstone, which principally lent in the Chicago Metropolitan Statistical Area (MSA) during the relevant period, redlined majority and high-majority African-American neighborhoods in the Chicago MSA. The CFPB refers to majority and high-majority African-American neighborhoods as neighborhoods that are more than 50% and more than 80% Black or African-American, respectively.
The DOJ, HUD and CFPB have made redlining claims, and entered into settlements, with banks under the ECOA and the FHA. Despite the substantial differences between banks and non-banks, including without limitation that banks are subject to the Community Reinvestment Act and can make loans for retention in portfolio, the CFPB for years has been exploring the potential of bringing a redlining complaint against a non-bank mortgage lender. And yet the CFPB has never issued guidance regarding how it would assess a non-bank mortgage lender for redlining purposes.
The complaint makes a number of standard allegations for a redlining complaint, but also includes a unique element regarding public statements the CFPB asserts were made by Townstone’s principals that may have prompted the CFPB to select Townstone as the test case for a redlining claim against a non-bank mortgage lender. In terms of the standard allegations, the complaint asserts that during the relevant period Townstone:
- Made no effort to market to African-Americans;
- Did not specifically target any marketing toward African-Americans in the Chicago MSA;
- Did not employ an African-American loan officer among its 17 loan officers;
- Received few applications from African-Americans—1.4% of its total applications– as compared to 9.8% for other lenders;
- Received almost no applications from applicants for properties located in African-American neighborhoods—five or six per year from high African-American neighborhoods, with half of those from White, Non-Hispanic applicants—and only between 1.4% and 2.3% of its applications came from applicants with regard to properties located in majority African-American neighborhoods; and
- In contrast, peer lenders drew 7.6% to 8.2% of their applications from majority African-American neighborhoods, and 4.9% to 5.5% of their applications from high African-American neighborhoods.
In addition to these standard allegations, the CFPB also cites statements that it asserts Townstone’s principals made in radio shows and/or podcasts that would discourage African-American prospective applicants from applying to Townstone for mortgage loans, and would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans. The CFPB asserts that during the relevant period Townstone conducted a weekly radio show and a weekly podcast. (By our calculation, if a radio show and podcast were each conducted nearly every week during the four-year relevant period, there would be approximately 400 total broadcasts.)
In the complaint, the CFPB addresses comments made in five broadcasts, including the following:
“Referring to a neighborhood grocery store with “people from all over the world” as a “jungle”—a word that may be used or understood to be a derogatory reference associated with African Americans, Black people, and foreigners—and saying that the grocery store was “scary” would discourage African-American prospective applicants from applying for mortgage loans from Townstone; would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans; and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in African-American neighborhoods.”
The CFPB’s claim that redlining violates the ECOA raises the issue of whether such a claim can be brought under the ECOA. The federal government maintains the position the redlining violates both the FHA and ECOA. However, the ECOA focuses on the treatment of applicants, and a redlining claim addresses individuals who are not applicants. The CFPB notes in the complaint that Regulation B, the ECOA’s implementing regulation, 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. But the ECOA itself does not set forth such a prohibition. Whether a redlining claim can be brought under the ECOA may well be an issue that awaits consideration by the Supreme Court. Additionally, as the alleged conduct dates back to January 1, 2014, the CFPB likely also includes an alleged CFPA violation in its complaint because the ECOA has a five-year statute of limitations but the CFPB can file a lawsuit for an alleged CFPA violation within three years after the date of the discovery of a violation. The CFPB asserts that the conduct of Townstone that the CFPB alleges violates the ECOA also violates the CFPA.