The CFPB has filed its opening brief in its appeal to the U.S. Court of Appeals for the Seventh Circuit from the district court’s decision in the CFPB’s enforcement action against Townstone Mortgage (Townstone).  In the case, the district court ruled that a redlining claim may not be brought under the Equal Credit Opportunity Act (ECOA) because the statute only applies to applicants.

The CFPB’s lawsuit against Townstone represented the Bureau’s first ever redlining complaint against a nonbank mortgage company.  In its complaint, the CFPB alleged violations of the ECOA and Consumer Financial Protection Act.  The U.S. District Court for the Northern District of Illinois granted Townstone’s motion to dismiss the CFPB’s complaint on the grounds that the ECOA applies to applicants and not to prospective applicants. 

While the ECOA only refers to applicants, Regulation B 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.” (emphasis added.)  The CFPB argued that the court, applying the Chevron framework, should defer to its interpretation of the ECOA in Regulation B. 

Since the U.S. Supreme Court’s 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., the “Chevron framework” has typically been invoked by courts when reviewing a federal agency’s interpretation of a statute.  Under the Chevron framework, a court will typically use a two-step analysis to determine if it must defer to an agency’s interpretation.  In step one, the court looks at whether the statute directly addresses the precise question before the court.  If the statute is ambiguous or silent, the court will proceed to step two and determine whether the agency’s interpretation is reasonable.  If it determines the interpretation is reasonable, the court will ordinarily defer to the agency’s interpretation.

The district court, applying step one of the Chevron framework, concluded that the “plain text of the ECOA . . . clearly and unambiguously prohibits discrimination against applicants, which the ECOA clearly and unambiguously defines as a person who applies to a creditor for credit.”  As a result, the court concluded that it “need not move on to the second step of the Chevron analysis because it is clear that the ECOA does not apply to prospective applicants.” (Internal quotation marks and citations removed.)

In its brief filed in the Seventh Circuit, the CFPB makes the following key arguments in support of reversal of the district court’s decision:

  • Under step one of the Chevron framework, the Seventh Circuit should conclude that Congress has clearly spoken to the precise question at issue in this case–whether, consistent with the ECOA, Regulation B can prohibit discriminatory discouragement.  In delegating ECOA rulemaking authority to the Federal Reserve Board, Congress specifically intended the Board (and now the CFPB) to regulate conduct not specifically mentioned in the ECOA if the failure to regulate would frustrate the ECOA’s purpose or permit evasion of the ECOA.  Regulation B has expressly protected prospective applicants from discriminatory discouragement since 1975 and Congress has never repudiated this interpretation of the ECOA. Congress evidenced its intent to protect prospective applicants by amending the ECOA in 1991 to add a referral provision that states specified agencies shall “refer [a] matter to the Attorney General whenever the agency has reason to believe that 1 or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit in violation of section 1691(a) of this title.”
  • Even if the Seventh Circuit concludes that Congress has not specifically addressed the question at issue, Congress has not foreclosed the Bureau’s interpretation of Regulation B.  Under the second step of the Chevron framework, the Seventh Circuit should find that Regulation B’s prohibition on the discouragement of prospective applicants is reasonable because it furthers the purpose of the ECOA to prohibit discrimination in credit transactions.  “Absent a prohibition on discouragement, a discriminating lender could easily frustrate the intent of Congress by discouraging applications on the basis of race, sex, or any of the other protected categories listed in section 1691(a).  Indeed, there may be no more obvious way to frustrate the central purpose of ECOA than by discouraging prospective applicants.”

The Supreme Court recently agreed to hear a case next Term (Loper Bright Enterprises, et al. v. Raimondo) in which the petitioners are directly challenging the continued viability of the Chevron framework.  There is considerable speculation that the Court’s conservative majority will curtail, if not overrule, Chevron.  Accordingly, the Seventh Circuit might defer any ruling in Townstone pending the Supreme Court’s decision in Loper.  (To listen to our recent podcast episode in which we discuss Loper, click here.)