District Court Rules Against CFPB Authority in ECOA Case

court scale with bookThe court approved a non-bank mortgage lender’s motion to dismiss a CFPB complaint on the grounds the bureau’s interpretation of how the statute applies in credit decisions; another example of legal pushback against the bureau’s actions.

02/09/2023 10:20 A.M.

3 minute read

A district court has dismissed an enforcement action from the Consumer Financial Protection Bureau stating the defendants violated the Equal Credit Opportunity Act (ECOA).

Case Background

In July 2020, the CFPB filed a lawsuit against Townstone Financial Inc. in the U.S. District Court for the Northern District of Illinois for alleged violations of the ECOA, according to the CFPB website for the case.

The bureau alleged that, “Townstone engaged in discriminatory acts or practices, including making statements during its weekly radio shows and podcasts through which it marketed its services, that discouraged prospective African-American applicants from applying for mortgage loans; discouraged prospective applicants living in African-American neighborhoods in the Chicago (Metropolitan Statistical Area-MSA) from applying for mortgage loans; and discouraged prospective applicants living in other areas from applying for mortgage loans for properties located in African-American neighborhoods in the Chicago MSA.”

The bureau filed an amended complaint in November 2020 adding the cofounder of Townstone to the lawsuit and seeking an injunction against the company, a nonbank retail-mortgage creditor and broker, damages, redress for consumers and a civil money penalty.

Motion to Dismiss

According to a summary of the case from ACA International member firm Barron & Newburger, the district court granted Townstone’s motion to dismiss because the CFPB failed to state a claim.

“The defendants moved motion to dismiss the suit for failure to state a claim, arguing that the CFPB improperly attempts to expand the ECOA’s reach beyond the express and unambiguous language of the statute. They asserted that while the ECOA regulates behavior towards applicants for credit, it does not regulate any behavior relating to prospective applicants who have not yet applied for credit,” according to Barron and Newburger.

The CFPB countered that the district court should accept the interpretation of the ECOA, however Judge Franklin U. Valderrama denied the bureau’s argument, stating:

“The plain text of the ECOA thus clearly and unambiguously prohibits discrimination against applicants, which the ECOA clearly and unambiguously defines as a person who applies to a creditor for credit. 15 U.S.C. Section 1691(a), 1691a(b). The [c]ourt therefore finds that Congress has directly and unambiguously spoken on the issue at hand and only prohibits discrimination against applicants.”

Another component of this case is the Chevron test, which stems from a U.S. Supreme Court decision in Chevron, U.S.A., Inc., v. Natural Resources Defense Council, Inc., on if a court should rely on an agency’s (such as the CFPB) meaning of a statute, according to a case summary from Ballard Spahr LLP.

ACA’s Take

The Illinois District Court declined to grant regulatory deference, essentially finding the ECOA is clear on its face that it applies to applicants for credit, explained Colin Winkler, ACA International’s senior counsel.

The ECOA and fair lending has been a significant issue on the CFPB’s regulatory agenda and court activity as far as the bureau’s authority in interpreting the statute could connect to other congressional and legal challenges the bureau is facing.

“This is another important development as courts around the country continue to push back on the CFPB’s novel legal theories in several areas, similar to what they have been trying to do in the collections space related to the Fair Credit Reporting Act,” said Leah Dempsey, ACA’s lobbyist and shareholder at Brownstein Hyatt Farber Schreck. “No agency, even an independent one with a single director, is empowered to rewrite laws enacted by Congress. The Townstone decision again highlights that point.”

If you have executive leadership updates or other member news to share with ACA, contact our communications department at [email protected]. View our publications page for more information and our news submission guidelines here.

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If you have executive leadership updates or other member news to share with ACA, contact our communications department at [email protected]. View our publications page for more information and our news submission guidelines here.




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