A federal judge dismissed a redlining lawsuit filed by the Consumer Financial Protection Bureau against a Chicago mortgage lender, calling the case “flawed,” and rejecting the bureau’s argument that discrimination in home loans applies to prospective applicants.
On Friday, Judge Franklin U. Valderrama of the U.S. District Court for the Northern District of Illinois, ruled that the lawsuit against Townstone Financial Inc., must be dismissed because the language in the Equal Credit Opportunity Act applies only to home loan applicants, not to prospective applicants. The distinction is important because it could limit the CFPB’s authority to file redlining cases, experts said.
Judge Valderrama rejected the CFPB’s allegations that Townstone’s President and CEO Barry Sturner’s remarks on a radio show had discouraged prospective applicants in Chicago from applying for home loans.
“The Bureau seeks to improperly expand the reach of ECOA to reach ‘prospective applicants,’ to regulate behavior before a ‘credit transaction’ even begins, and to create affirmative advertising and hiring requirements, which cannot be squared with the unambiguous language of the statute,” the judge wrote.
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The judge also ruled that the comments amounted to free speech.
“Contrary to the First Amendment of the United States Constitution, the Bureau seeks to regulate the content and viewpoint of protected speech and does so in a way that is unconstitutionally overbroad and vague both as applied to Townstone and facially,” Valderrama wrote.
Still, the dismissal of the CFPB’s case may have a limited impact because the Department of Justice and the Department of Housing and Urban Development are the two main federal agencies, along with the CFPB, that typically file redlining cases under both ECOA and the Fair Housing Act, some experts said.
The CFPB declined to comment on whether it plans to appeal. The case was dismissed with prejudice, meaning the CFPB cannot file the same case again.
Lawyers for Townstone said the ruling could have a more far-reaching impact than just fair lending cases. Steve Simpson, senior attorney at Pacific Legal Foundation, said the district court did not give deference to the CFPB’s allegations that lenders can be liable for discriminating in marketing to potential borrowers.
“It kind of drives a truck through the centerpiece of what the CFPB — and by extension the DOJ — have used in a lot of their fair-lending cases, which we call “marketing discrimination,” because it’s a ridiculous legal theory,” Simpson said. “But even beyond that, the case has implications for administrative law and separation of powers cases going on across the country, even outside the fair-lending context.”
Judge Valderrama, a Trump appointee, specifically pushed back against the issue of “Chevron deference,” a doctrine borne of a 1984 U.S. Supreme Court case that granted federal agencies a wide berth in interpreting ambiguous congressional statutes. Chevron deference has come under significant scrutiny by several justices on the Supreme Court that have expressed skepticism of administrative agencies.
In dismissing the case, Judge Valderrama wrote: “The scope of liability created by an expansion of ECOA to include ‘prospective applicants’ is unreasonable and unworkable. When a statute is unambiguous, agency regulations, or statutory interpretations are not entitled to deference. To the extent [Regulation B] and/or the Bureau attempt to regulate behavior relating to ‘prospective applicants,’ no deference should be given to Reg. B or the Bureau’s interpretation.”
The CFPB’s investigation of Townstone began in 2017 and the company was forced to downsize from a mortgage lender to a mortgage broker because of the cost of five years of defending itself, lawyers said.
“It took so many resources to fight this government overreach,” said Richard Horn, co-managing partner at Garris Horn LLP. “The power to investigate is the power to destroy and government overreach has a huge impact on companies.”
