The Mortgage Bankers Association and Housing Policy Council (the “Associations”) recently filed an Amici Curiae brief supporting the position of Townstone Financial regarding the scope of the Equal Credit Opportunity Act (ECOA) in the case CFPB v. Townstone Financial which is now before the U.S. Court of Appeals for the Seventh Circuit. As previously reported, earlier this year a federal district court granted Townstone’s motion to dismiss the CFPB’s redlining complaint against the company under the ECOA on the grounds that the ECOA applies to applicants and not to prospective applicants. The CFPB then filed an appeal with the Seventh Circuit. The CFPB has filed its brief, and is supported by a number of parties that filed amicus briefs. Townstone also has filed its brief.

At the heart of the matter is the provision under the ECOA regulation, Regulation B, 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.” While Regulation B refers to “prospective applicants,” the ECOA only refers to “applicants” and defines an “applicant” as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”

The Associations support the position of Townstone that the ECOA only applies to applicants in several respects, including the following arguments:

  • The Associations first rebut the position of the CFPB and amici supporting the CFPB that a ruling that upholds the district court’s opinion would eliminate any prohibition on pre-application activity. The Associations correctly point out that mortgage lenders also are subject to the Fair Housing Act (FHA), which “predates ECOA and explicitly prohibits pre-application activity, stating that lenders must not discriminate “in making available” a residential mortgage loan or other financial assistance for dwelling.” The Associations add that while Congress could have chosen to pattern the ECOA after the FHA, it did not do so, nor did Congress grant the CFPB the authority to enforce the FHA. The FHA may be enforced by the U.S. Department of Housing and Urban Development, the U.S. Department of Justice and the federal banking regulators. We view this as a very important point. When Congress wanted to prohibit redlining, it knew how to craft language to do so in the FHA, and it did not include such language, or similar language, in the ECOA.
  • The Associations then turn their attention to the “Chevron framework” set forth by the U.S. Supreme Court in its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. 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 defer to the agency’s interpretation. (As previously reported, the U.S. 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. As previously reported, on September 7, 2023, at the ABA Business Law Section Fall Meeting in Chicago, Alan Kaplinsky, Ballard Spahr Senior Counsel in the firm’s Consumer Financial Services Group, will moderate a program, “U.S. Supreme Court to Revisit Chevron Deference: What the SCOTUS Decision Could Mean for CFPB, FTC, and Federal Banking Agency Regulations.”)
  • The Associations state that the district court’s decision should be affirmed because the anti-discouragement provision of Regulation B fails Chevron step 1. The Associations assert that “Congress has unambiguously spoken—ECOA extends only to “applicants,” and not “prospective applicants.” Regulation B’s attempt to expand ECOA to reach prospective applicants is thus impermissible.” The Associations note that the ECOA defines “applicant” as “any person who applies to a creditor directly for an extension, renewal or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit” and that courts have interpreted this to mean that a person is an applicant only if they request credit. The Associations also address the claim by the CFPB that 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.” The Associations state that the amendment “is a procedural, not substantive, amendment, meaning that the purpose of Section 1691e(g) is to grant agencies the procedural authority to refer cases to the Attorney General when applicable, not to expand the substantive reach of ECOA.” The Associations also point out that the section refers to “applications” and not “prospective applications.”
  • The Associations assert that even if the discouragement provision of Regulation B survives step 1 of the Chevron framework, it would fail step 2 because the interpretation of the ECOA is arbitrary and capricious. The Associations point out that Regulation B provides that a creditor cannot “discourage” “prospective applicants” from making or pursuing an application, but does not define what would render any individual a “prospective” applicant. The Associations assert that this is in contrast to the ECOA, which expressly defines an applicant as a “person who applies to a creditor” for credit. The Associations state that combining the ECOA’s definition of “applicant” with the dictionary definition of “prospective” suggests that the anti- discouragement provision of Regulation B would potentially apply to an individual who is “likely to be or become” a person who applies to a creditor for credit. The Associations then raise a number of questions to highlight that such a definition is unclear and could lead to arbitrary and capricious enforcement by the CFPB:

“Is someone a prospective applicant if she hears a message discouraging an application but has no present or future intention of applying for credit? Is she a prospective applicant if she does not have a present intention of applying for credit, but has such an intention to do so in six months? What if there is a thirty percent chance she may want to apply for credit in three years? What if she has an intention of applying for credit, but from her local bank rather than from the lender whose discouraging message she heard? What if the individual does not actually hear or see the purportedly discouraging “oral or written statement”? Because Regulation B leaves so many questions unanswered, potential lenders cannot develop compliance programs to ensure that they are following the law.”

  • Finally, the Associations assert that even if Regulation B’s prohibition on discouraging prospective applicants from applying for credit on a prohibited basis is determined to be consistent with the ECOA, that should not end the inquiry. The Associations argue that in such case the court should ensure that the CFPB’s application of Regulation B is consistent with the ECOA by adopting two limiting interpretive principles: (1) The CFPB must plead, and ultimately prove at trial, that the lender has affirmatively discouraged applications on a prohibited basis, and (2) the CFPB must plead, and ultimately prove at trial, that the lender’s affirmatively discouraging statements in fact caused identifiable applicants or prospective applicants to be discouraged from making or pursuing an application.

Other parties filing amicus briefs in support of Townstone include Hamilton Lincoln Law Institute and, jointly, America’s Future, Free Speech Coalition, Free Speech Defense and Education Fund, U.S. Constitutional Rights Legal Defense Fund, and Conservative Legal Defense and Education Fund.