Townstone Mortgage (Townstone) has filed its brief in the CFPB’s 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.  In the decision, 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 (CFPA).  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.  It also dismissed the CFPA claim because it was dependent on the ECOA claim.

ECOA Section 1691(a) makes it unlawful for a creditor to discriminate “against any applicant, with respect to any aspect of a credit transaction” on a prohibited basis.  While Section 1691(a) refers only 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 must 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.)

The CFPB filed its brief in the Seventh Circuit in which it argues that the Seventh Circuit should reverse the district court’s decision.

In its brief filed in the Seventh Circuit, Townstone refers to the Regulation B provision prohibiting discouragement of “prospective applicants” on a prohibited basis as the “anti-discouragement rule.”  Townstone makes the following key arguments in support of affirming the district court’s decision:

  • Under step one of the Chevron framework, the ECOA unambiguously bars discrimination only against “applicants” with respect to any aspect of a “credit transaction.”  The ECOA definition of “applicant” is limited to an identifiable person who requests credit from a creditor.  Adding “prospective” to “applicant,” as the CFPB does in its anti-discouragement rule, obliterates this limitation.  Also, the anti-discouragement rule cannot be reconciled with the unambiguous meaning of “discrimination” and “credit transaction” in the ECOA.  Section 1691(a) prohibits discrimination “with respect to any aspect of a credit transaction.”  As defined by Regulation B, a “credit transaction” includes “every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit.”  Thus, a “credit transaction” requires two or more identifiable individuals acting in concert with the goal of obtaining credit from the other.  While the ECOA does not define “discrimination,” Regulation B defines “discriminate against an applicant” as “treat[ing] an applicant less favorably than other applicants.”  Thus, to discriminate on a prohibited basis, a creditor must treat an applicant differently than other applicants because of the applicant’s race or other protected characteristics.  “Discourage” is a far broader term that is much less susceptible to an objective definition than “discrimination.”  Discrimination under section 1691(a) turns on the actions of the creditor and is fact-based and objective.  Discouragement, under the rule, turns entirely on the listener’s subjective reaction.
  • To be entitled to reach step two of the Chevron framework, an agency must show either ambiguity in the statute or an explicit gap that Congress left for the agency to fill.  The ECOA provision that directs the CFPB to enact regulations that “are necessary or proper to effectuate the purposes of [the ECOA] [and] prevent circumvention or evasion thereof” is a general rulemaking provision and not a gap-filling provision because it did not direct the CFPB to elaborate on a particular statutory term or provision.  If a statement that an agency can issue rules to prevent “evasion or circumvention” can justify the anti-discouragement rule, it could be used to justify virtually any change to the ECOA.
  • Congress did not authorize the anti-discouragement rule 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.”  This provision should be read to require referrals to the Attorney General only when an agency believes that creditors are engaging in a pattern or practice of turning away individuals who are requesting credit because of their race or other prohibited basis.  This is the best reading of the referral provision because it is based on the actual language used by Congress and does not require the court t  o conclude that Congress intended one word in the provision to effect a sea-change in the ECOA.  While the phrase “discouraging or denying applications” in this provision, standing alone, could be interpreted to include more than “discrimination” against applicants, including language that is broader than “discrimination” makes sense in a provision whose purpose is to ensure that agencies are referring matters, which might be pattern or practice violations, for investigation.  However, such language does not stand alone in the referral provision and is limited by “in violation of section 1691(a),” and there is no indication that Congress intended to change the meaning of section 1691(a).
  • Even if the court concludes Congress did not speak to the precise issue at hand, the anti-discouragement rule still fails under step two of the Chevron framework.  It is not a permissible interpretation of the ECOA because it fundamentally changes the ECOA’s core liability provision, section 1691(a), under which a creditor is liable only by taking a specific action—discrimination—against a known individual—an applicant—with whom the creditor knows it is dealing in a credit transaction.  The anti-discouragement rule changes this dynamic entirely by imposing liability on creditors simply for making public statements that, based on the listener’s subjective reaction, would discourage them from seeking credit from anyone.
  • If the court concludes that the anti-discouragement rule is valid, it should hold that the rule is unconstitutional because it violates the First and Fifth Amendments.  It violates the First Amendment for reasons that include (1) it gives the CFPB unbridled discretion to decide who may speak and what they may say because violations of the anti-discouragement rule turn entirely on the subjective views of the listener, which is no standard at all, and (2) the CFPB is enforcing the anti-discouragement rule against Townstone because of its views.  It is unconstitutionally vague and overboard in violation of the First and Fifth Amendments because a person of ordinary intelligence cannot know, in advance, what it prohibits.

The Supreme Court has 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.)

At the ABA Section of Business Law Annual Meeting in Chicago on September 7, 2023, Alan Kaplinsky will be moderating a program titled, “U.S. Supreme Court to Revisit Chevron Deference: What the SCOTUS Decision Could Mean for CFPB, FTC, and Federal Banking Agency Regulations.”