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Financial Services Law Insights and Observations

District Court dismisses CFPB redlining action against nonbank lender

Courts Enforcement Redlining Consumer Finance Fair Lending CFPB CFPA ECOA Discrimination Regulation B

Courts

On February 3, the U.S. District Court for the Northern District of Illinois dismissed with prejudice claims that a Chicago-based nonbank mortgage company and its owner violated ECOA by engaging in discriminatory marketing and applicant outreach practices. The CFPB sued the defendants in 2020 alleging fair lending violations, including violations of ECOA and the CFPA, predicated, in part, on statements made by the company’s owner and other employees during radio shows and podcasts from 2014 through 2017. (Covered by a Special Alert.) The complaint (which was later amended) marked the first time a federal regulator has taken a public enforcement action against a nondepository institution based on allegations of redlining.

The Bureau claimed that the defendants discouraged African Americans from applying for mortgage loans from the company and redlined African American neighborhoods in the Chicago area by (i) discouraging their residents from applying for mortgage loans from the company; and (ii) discouraging nonresidents from applying for loans from the company for homes in these neighborhoods. The defendants moved to dismiss with prejudice, arguing that the Bureau improperly attempted to expand ECOA’s reach “beyond the express and unambiguous language of the statute.” The defendants explained that while the statute “regulates behavior towards applicants for credit, it does not regulate any behavior relating to prospective applicants who have not yet applied for credit.” The Bureau countered that courts have consistently recognized Regulation B’s discouragement prohibition even when applied to prospective applicants.

In dismissing the action with prejudice, the court applied step one of Chevron framework (which is to determine “whether Congress has directly spoken to the precise question at issue”) when reviewing whether the Bureau’s interpretation of ECOA in Regulation B is permissible. Explaining that ECOA’s plain text “clearly and unambiguously prohibits discrimination against applicants”—defined as a person who applies for credit—the court concluded (citing to case law in support of its decision) that Congress’s directive only prohibits discrimination against applicants and does not apply to prospective applicants. The court stressed that the agency’s authority to enact regulations is not limitless and that the statute’s use of the term “applicant” clearly marks the boundary of ECOA.

The court also rejected the Bureau’s argument that ECOA’s delegation of authority to the Bureau to adopt rules to prevent evasion means the anti-discouragement provision must be sustained provided it reasonably relates to ECOA’s objectives. The Bureau pointed to the U.S. Supreme Court’s decision in Mourning v. Fam. Publ’ns Serv., Inc. (upholding the “Four Installment Rule” under similar delegation language in TILA), but the court held that Mourning does not permit it to avoid Chevron’s two-step framework. Because the anti-discouragement provision does not survive the first step, the court did not reach whether the provision is reasonably related to ECOA’s objectives and dismissed the action with prejudice. The remaining claims, which depend on the ECOA claim, were also dismissed with prejudice.

The firm will be sending out a Special Alert in the next few business days providing additional thinking on this decision.