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A three-judge panel in the Seventh Circuit on Thursday reversed a district court judge’s ruling and allowed a Consumer Financial Protection Bureau lawsuit against a notorious non-bank mortgage company accused of rampant racial discrimination to go forward.
The ruling preserves the ability for regulatory enforcers to use the Equal Credit Opportunity Act (ECOA) the way it traditionally has been used in its 50 years of existence: to discourage any discriminatory activity by lenders, even if it occurs before a borrower turns in an application for credit.
“When the text of the ECOA is read as a whole, it is clear that Congress authorized the imposition of liability for the discouragement of prospective applicants,” wrote Judge Diane Sykes, the chief judge of the Seventh Circuit and a George W. Bush appointee. The other two judges on the panel were also appointed by Republicans: Kenneth Ripple (a Reagan appointee) and Ilana Rovner (George H.W. Bush).
There was concern last year, when briefs were filed in the case, that the Supreme Court’s imminent ruling in Loper Bright Enterprises v. Raimondo, reversing the so-called “Chevron deference” that courts had given to administrative agencies interpreting federal statutes, might hinder the CFPB’s case and hobble the ECOA. But though the Court did reverse Chevron last month, the Seventh Circuit judges still reached a conclusion protecting ECOA, simply by reading the legislation.
It’s notable that, in a time where conservative judges are rewriting regulatory rules to suit their ideological ends, three Republican appointees managed to actually read a statute, figure out the broad scope of its intent, and apply the law. There’s hope for the judiciary yet.
THE CASE INVOLVES CHICAGO-BASED TOWNSTONE FINANCIAL, which starting in 2014 ran an infomercial radio program and podcast that generated the vast majority of its mortgage applications. The show’s hosts, who are senior loan officers at the company, made comments calling African American communities in the Chicago area “a real war zone” and havens for “hoodlum[s].” Almost none of Townstone’s mortgage applications were from Black borrowers, and almost none of its approvals went to Black borrowers or in majority-Black areas.
The conduct was seen as so egregious that the CFPB under Trump’s handpicked director, Kathy Kraninger, filed the lawsuit in July 2020. The theory of the case was simple: Townstone discouraged Black borrowers by making racist comments in the venue responsible for practically all of its applications.
But Townstone argued that ECOA only applies to applicants, not those who may be discouraged from applying. District court judge Franklin Valderrama agreed with Townstone, citing certain language in the statute that refers to applicants, and even tallying up the number of times the word “applicants” is used in the statute (26). That approach was at odds with how ECOA was historically employed.
Targeted online marketing efforts that “prescreen” applicants are a growing segment of the lending business.
Valderrama was a Trump nominee appointed in 2020, but one with broad support throughout Illinois’s congressional delegation, including Sen. Dick Durbin (D-IL), the current chair of the Senate Judiciary Committee. Valderrama was selected in a package deal where Democrats would get one of the four open judgeships in Illinois; he was the Democratic choice.
In his ruling, Judge Valderrama overlooked the actual implementing regulation of ECOA, Regulation B, which dates back to 1975, which explicitly states that “prospective applicants” cannot be discriminated against. (Federal law also states clearly that statutory language in the present tense also includes the future tense, which would mean that prospective applicants would be included.)
The CFPB, in its appeal, explained that if the ruling were upheld, non-bank lenders, which account for more than two-thirds of all mortgage lending, would be legally able to post a “Whites Only” sign outside their storefront or on their website, and that would not violate ECOA. Other consumer loans besides mortgages are also governed by ECOA, including auto loans, small-business loans, and personal loans. Valderrama’s ruling would have given non-bank lenders in all of these contexts a legal avenue to discriminate against borrowers searching for credit, by giving longer and more complex applications to Black, Hispanic, Jewish, Catholic, female, elderly, married, or LGBT borrowers.
Targeted online marketing efforts that “prescreen” applicants are a growing segment of the lending business. This loophole could have practically been exploited by such businesses if Judge Valderrama’s ruling was upheld.
The Seventh Circuit didn’t agree with Judge Valderrama because they looked at the textual history of the statute and the regulation that implemented it. First off, Regulation B indeed prohibits discrimination against “prospective creditors.” Just as important, the judges wrote, Congress affirmatively granted broad authority to the regulator—“The Board shall prescribe regulations to carry out the purposes of this title.” The “Board” refers to the Federal Reserve Board, which before the establishment of the CFPB had authority for consumer protection in financial transactions.
That specific, broad grant of authority, as the judges found in congressional committee reports, was expanded during the legislative process. It was changed to match the wording of the Truth in Lending Act, specifically because that act had “successfully withstood several litigation challenges.” In other words, Congress wanted to make the grant of regulatory authority bulletproof, and thought it had done so.
Moreover, when Congress amended ECOA in 1991, it was aware of Regulation B, and made no attempt to modify its language regarding prospective applicants. Further amendments also required regulatory agencies to refer cases to the Justice Department if creditors “engaged in a pattern or practice of discouraging or denying applications for credit,” a clear reference to prospective applicants. And the entire scope of ECOA prohibits discrimination on “any aspect” of a credit transaction. That has to include the pre-application stage.
The judges mentioned that Loper Bright had just been decided, but that did not shift their opinion that “the text (of ECOA) prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit … The term ‘applicant’ cannot be read in a crabbed fashion that frustrates the obvious statutorily articulated purpose of the statute.”
This kind of actual wrestling with legislative history is remarkably free of subjective considerations. Originalism can often be a fig leaf that hides an “anything goes” attitude where judges substitute their ideological preferences for the law. But in this case, the judges read the statute, and made reasonable inferences of what it says. Amazingly, that has to be seen as a step forward.
The court sent the case back to the district court to address on the merits. But the bigger news is that a giant loophole in ECOA that would have enabled racial discrimination against potentially millions of borrowers has, for now, been averted.
