Following lengthy litigation, the CFPB is attempting to close the books on its case against Townstone Financial alleging discriminatory lending practices and redlining African American neighborhoods in Chicago.

If the proposed order submitted by the CFPB is approved by the U.S. District Court for the Northern District of Illinois, Townstone would be prohibited from taking any actions in connection with offering or providing mortgage loans that violate the Equal Credit Opportunity Act (ECOA) and would be required to pay a $105,000 penalty to the CFPB’s victims relief fund.

The action follows litigation and a unanimous July 2024 decision by a panel of judges from the United States Court of Appeals for the Seventh Circuit that stated that the ECOA prohibits lenders from discouraging prospective applicants on a prohibited basis from applying for loans.

The Seventh Circuit decision “held that ‘an analysis of the text of the ECOA as a whole makes clear that the text prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit,’ which is consistent with the Bureau’s regulation interpreting ECOA,” the bureau said.

The panel reversed the decision of the district court, which had initially dismissed the lawsuit on the grounds that the ECOA applies only to applicants and, thus, a redlining claim cannot be maintained under the statute.  The panel remanded the case for further proceedings. We previously addressed both the district court’s ruling and the ruling  of the 7^th Circuit panel. We maintain our view that the panel’s decision, which is sparse in analysis, is not a correct interpretation of the ECOA, and that the district court’s ruling, which has a much more robust analysis of the issues, got it right. In our view, the ECOA only applies to applicants. If the issue of whether the ECOA covers prospective applicants were to reach the Supreme Court in its current composition, the CFPB likely would not be pleased with the result. 

Townstone operated as a nonbank retail-mortgage creditor and broker based in Chicago during the period addressed by the CFPB, and currently operates as a mortgage broker. The CFPB said that 90% of Townstone’s mortgage lending was in the Chicago metropolitan area. According to the CFPB, from 2014 through 2017, Townstone ranked in the top 10 percent of lenders that drew applications from the Chicago metropolitan area, receiving an average of 740 mortgage loan applications each year, the bureau said.

The bureau sued Townstone in 2020, alleging that the company discouraged potential applicants because of their race or the racial composition of the neighborhood where they lived or sought to live.

“Specifically, Townstone’s advertising, marketing, and business practices discouraged African Americans from applying for credit and actively avoided the credit needs of African American applicants and African American neighborhoods in the Chicago metropolitan area,” the bureau said.

Townstone drew only five or six applications a year for properties in neighborhoods that were more than 80% African American. Those neighborhoods representing nearly 14% of census tracts in the Chicago metropolitan area. The bureau said that more than half of the applications Townstone did draw from those neighborhoods were from white applicants. From 2014 through 2017, about 2% of Townstone’s mortgage-loan applications were for properties in majority African American neighborhoods, even though they make up nearly 19% percent of the Chicago metropolitan area’s census tracts.

Townstone neither admitted nor denied the CFPB’s allegations in the proposed order. In comparison to other CFPB redlining settlements, as well as Department of Justice redlining settlements, the monetary aspect is modest and the conduct provisions are limited.