Fair Lending Deception by the CFPB

The Trump CFPB is seeking to vacate the consent order it entered into Townstone Mortgage for alleged violations of the Equal Credit Opportunity Act (ECOA). According to the Trump CFPB, CFPB staff engaged in misconduct by bamboozling former CFPB Director Kathy Kraninger about the legal strength of the case because they were woke warriors who took the position that “disparity automatically equaled discrimination,” and “wanted a de-facto mortgage quota, a policy aligned with the views of radical DEI proponents like Robin DiAngelo and Ibram X Kendi.” That view is hard to reconcile with the total number of discriminatory lending suits the CFPB has brought over the past eight years:  all of seven cases. Yup, that sure sounds like an out-of-control agency. 

 

If the Trump-controlled CFPB wants a consent order vacated "in the interests of justice," the district court should require it to prove both that there was in fact misconduct and that the misconduct harmed the defendant. The only "evidence" of this supposed misconduct is a self-serving, hearsay declaration by Dan Bishop, the Deputy Director of OMB (deputized to CFPB) reporting on his own alleged investigation. That's not "evidence." (And that's putting aside whether Bishop has been legally appointed to a CFPB position...)

 

But even if Bishop's story is credited entirely, there's still a problem. The supposed misconduct related to disparate impact liability and the reason the CFPB served a Civil Investigatory Demand on Townstone in the first place, but the defendant was sued for facial discrimination based discouragement of credit applications based on public statements its CEO made on a radio show named after the company. The Bureau could have brought the case without the information from the Civil Investigatory Demand. There’s no nexus between the supposed misconduct and the CFPB’s lawsuit, so there cannot be prejudice to the defendant. Accordingly, there's no reason to vacate the judgment in the interests of justice.

 

Here’s the background. In 2020, the Trump-appointed CFPB Director, Kathy Kraninger, approved an enforcement action against Townstone Mortgage and its CEO, Barry Sturner, for violating ECOA. The basic allegation in the suit was that comments Sturner made on the radio denigrating the predominantly black South Side of Chicago "discouraged prospective African-American applicants from applying for mortgage loans; discouraged prospective applicants living in African-American neighborhoods in the Chicago 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.” Specifically, Sturner is alleged to have referred on the radio to the weekends on the South Side as “hoodlum weekend” and stated that the police are “the only ones between that [area] turning into a real war zone and keeping it where it’s kind of at.” He described the Jewel-Osco grocery store on Division Street as the “Jungle Jewel.” The only ECOA claim the CFPB made was a discouragement claim. There was no disparate impact claim in Townstone. 

 

Townstone argued in its motion to dismiss that ECOA covers only actual discrimination in lending (disparate policies or disparate impact), not discouragement. It never raised a 1st Amendment challenge to ECOA in the district court. ECOA provides that:

It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction—

(1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract).

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.”

 

While this definition might seem to make ECOA's prohibition applicable only to someone who has actually applied for a loan, rather than a mere prospective applicant, Regulation B, the implementing regulation, has since 1975 made clear that the prohibition extends to discouragement of applications. The implementing regulation was originally drafted by the Federal Reserve Board, but transferred to the CFPB, which revised it in 2016 in ways that are not germane. 

 

Townstone won in the district court, but the case went up to the 7th Circuit, where (post-Loper Bright) the CFPB prevailed on the interpretation of ECOA. Frankly, the 7th Circuit’s interpretation makes sense:  if the lender is flying a swastika flag, it hardly needs to reject Jewish application—they won’t apply—so that even if the lender does not actually discriminate toward applicants, the discouragement of applications produces the same result, namely a reduction in lending to people solely because of their membership in a protected class.  That’s exactly what ECOA is supposed to prevent. 

 

After the 7th Circuit ruling, Townstone entered into a consent order with the CFPB, while the suit against Sturner was dismissed with prejudice. 

 

The Trump CFPB is now seeking to have the consent decree vacated based on a sort of “fruit of the poisonous tree” theory, namely that Townstone should never have been in the CFPB’s sights in the first place, but only ended up as an enforcement target because of statistical disparities in lending, namely that it was making a much lower percentage of its loans to blacks than would be expected by the population geographic area it serves. The apparent motivation was that the Bureau's staff allegedly took the position that “disparity automatically equaled discrimination,” and that they “wanted a de-facto mortgage quota, a policy aligned with the views of radical DEI proponents like Robin DiAngelo and Ibram X Kendi.” The Trump 2.0 CFPB is alleging that the Trump 1.0 CFPB was biased to see disparate impact discrimination anywhere that there was a statistical difference in white and black borrowers getting loans. 

 

This is beyond bizarre. Ibram X. Kendi is as irrelevant to this case as Ayn Rand. Looking for statistical disparities in lending is exactly what the Bureau is tasked with doing:  that’s the whole reason the Home Mortgage Disclosure Act exists. But mere statistical disparities are not alone an ECOA violation. Indeed, if the CFPB were actually a bunch of woke warriors insistent that any lack of equal outcomes is discriminatory lending, then one would have expected a flurry of disparate impact suits to have been brought by the CFPB under Directors Kraninger and Chopra. Instead, the total head count of discriminatory lending suits brought by the Bureau in those eight years was…seven, including Townstone. That’s two under Kraninger CFPB and five under Chopra CFPB. (I’m excluding suits about HMDA reporting issues or failure to give proper adverse action notices, but that just adds a few more cases anyhow). Let that sink in: this supposedly out-of-control regulatory agency has brought all of seven discriminatory lending cases in the past eight years.  

 

In any event, the Bureau’s conduct and motivation regarding disparate impact is irrelevant here:  this was a discouragement case, not a disparate impact case. The issue was Sturner’s statements, not the actual lending. 

 

As for those statements, they were, according to the Trump CFPB, were just run of the mill speech. Sturner was supposedly merely "talking about local crime, political issues around freedom of speech, supporting local law enforcement, and telling people to check out a neighborhood before buying a home.”  

 

Sturner’s statements were not the strongest set of facts for a discouragement case because there’s some deniability in them—he didn’t come out and say “Blacks need not apply”—but I grew up on the South Side of Chicago. To me, it’s obvious what Sturner was saying. But don't take my word for it. Here's a Reddit from 2018 (after Sturner's comment, but prior to the CFBP's suit) in which commentators point out the origins of the "Jungle Jewel" name—it was across the street from the infamous Cabrini-Green housing project—and some of the commentators even call out the term as racially offensive. 

 

I hope the district court presses the CFPB to produce some evidence to back up its claims that there was misconduct and bias and that such misconduct or bias had any bearing on Townstone’s liability. If the CFPB cannot prove that misconduct or bias prejudiced Townstone, the court should leave the consent order intact. 

 

Post script: The Vought CFPB’s actions are a signal that lenders are free to engage in discriminatory discouragement for the next four years. But lenders should remember that ECOA and Reg B are still on the books and have a 5 year statute of limitations.  

 

Post post script: Given that the Bureau employees who actually know anything about the case or its background are all off on administrative leave, one has to wonder how the five guys in a room with a phone discovered all the alleged misconduct and bias and wrote up the press release. Could it have been drafted by defense counsel or associated think tanks (Pacific Legal...)?

 

Post post post script: I'm left wondering if anyone will try to intervene in the case. The most obvious parties to me are the City of Chicago and the Illinois Attorney General.