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The CFPB recently filed its opening brief in the agency’s appeal of a district court’s decision to dismiss the Bureau’s claims that a Chicago-based nonbank mortgage company and its owner violated ECOA by engaging in discriminatory marketing and consumer outreach practices. As previously covered by InfoBytes, the Bureau sued the defendants in 2020 alleging fair lending violations predicated, in part, on statements made by the company’s owner and other employees during radio shows and podcasts. The agency claimed that the defendants discouraged African Americans from applying for mortgage loans and redlined African American neighborhoods in the Chicago area. The defendants countered that the Bureau improperly attempted to expand ECOA’s reach and argued that ECOA “does not regulate any behavior relating to prospective applicants who have not yet applied for credit.”
In dismissing the action with prejudice, the district court applied step one of the 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. The court concluded, among other things, that Congress’s directive does not apply to prospective applicants.
In its appellate brief, the Bureau argued that the long history of Regulation B supports the Bureau’s interpretation of ECOA, and specifically provides “that ‘[a] creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” While Congress has reviewed ECOA on numerous occasions, the Bureau noted that it has never challenged the understanding that this type of conduct is unlawful, and Congress instead “created a mandatory referral obligation [to the DOJ] for cases in which a creditor has unlawfully ‘engaged in a pattern or practice of discouraging or denying applications for credit.’”
Regardless, “even if ECOA’s text does not unambiguously authorize Regulation B’s prohibition on discouraging prospective applicants, it certainly does not foreclose it,” the Bureau wrote, pointing to two perceived flaws in the district court’s ruling: (i) that the district court failed to recognize that Congress’s referral provision makes clear that “discouraging . . . applications for credit” violates ECOA; and (ii) that the district court incorrectly concluded that ECOA’s reference to applicants “demonstrated that Congress foreclosed prohibiting discouragement as to prospective applicants.” The Bureau emphasized that several courts have recognized that the term “applicant” can include individuals who have not yet submitted an application for credit and stressed that its interpretation of ECOA, as reflected in Regulation B’s discouragement prohibition, is not “arbitrary, capricious, or manifestly contrary to the statute.” The Bureau argued that under Chevron step two (which the district court did not address), Regulation B’s prohibition on discouraging prospective applicants from applying in the first place is reasonable because it furthers Congress’ efforts to prohibit discrimination and ensure equal access to credit.
Additionally, the FTC filed a separate amicus brief in support of the Bureau. In its brief, the FTC argued that Regulation B prohibits creditors from discouraging applicants on a prohibited basis, and that by outlawing this type of behavior, it furthers ECOA’s purpose and prevents its evasion. In disagreeing with the district court’s position that ECOA only applies to “applicants” and that the Bureau cannot proscribe any misconduct occurring before an application is filed, the FTC argued that the ruling violates “the most basic principles of statutory construction.” If affirmed, the FTC warned, the ruling would enable creditor misconduct and “greenlight egregious forms of discrimination so long as they occurred ‘prior to the filing of an application.’”
Several consumer advocacy groups, including the National Fair Housing Alliance and the American Civil Liberties Union, also filed an amicus brief in support of the Bureau. The consumer advocates warned that “[i]nvalidating ECOA’s longstanding prohibitions against pre-application discouragement would severely limit the Act’s effectiveness, with significant consequences for communities affected by redlining and other forms of credit discrimination that have fueled a racial wealth gap and disproportionately low rates of homeownership among Black and Latino households.” The district court’s position would also affect non-housing credit markets, such as small business, auto, and personal loans, as well as credit cards, the consumer advocates said, arguing that such limitations “come at a moment when targeted digital marketing technologies increasingly allow lenders to screen and discourage consumers on the basis of their protected characteristics, before they can apply.”
The CFPB recently published a letter clarifying the extent to which ECOA and Regulation B apply to franchise financing. The letter also examines how the Bureau’s small business lending rule (finalized in March and covered by InfoBytes here) applies to franchise financing. The Bureau explained that franchisees generally obtain credit either directly from the franchisor or from a third-party finance company. ECOA and Regulation B, the Bureau said, generally apply to business credit (defined as “extensions of credit primarily for business or commercial (including agricultural) purposes,” with limited exclusions), as well as to other credit extended primarily for personal, family, and household use, and that, as such, creditors, including franchisors that provide financing to franchisees are subject to ECOA and Regulation B’s core prohibitions against discrimination. The small business lending rule also covers business credit, the Bureau said, commenting that entities providing credit to franchisees “would generally be financial institutions subject to the rule’s data collection and reporting requirements to the same extent as any other provider of business credit, unless they are subject to one of the narrow exclusions from coverage.”
The Bureau added that it also “anticipates that third-party entities providing credit to franchisees that meet the origination threshold for coverage will be required to collect and report data under the small business lending rule regardless of whether that company is affiliated with the franchisor.” A possible “trade credit” exemption may apply in certain circumstances where a franchisor directly provides credit to a franchisee (trade credit is defined under the small business lending rule “as a ‘financing arrangement wherein a business acquires goods or services from another business without making immediate payment in full to the business providing the goods or services.’”). However, even if the franchisor is covered by the trade credit exemption it still must comply with ECOA and Regulation B’s prohibitions against discrimination.
11th Circuit: ECOA anti-discrimination provision against requiring spousal signature does not apply to defaulted mortgage during loan modification offer
On April 27, the U.S. Court of Appeals for the Eleventh Circuit affirmed a lower court’s decision to enter judgment in favor of a defendant national bank following a bench trial related to claims arising from foreclosure proceedings on the plaintiff’s home. The plaintiff executed a promissory note secured by a mortgage signed by both the plaintiff and her husband. After the borrowers defaulted on the mortgage, the defendant filed a foreclosure action and approved the plaintiff for a streamlined loan modification while the foreclosure action was pending. One of the conditions of the streamlined loan modification was that the plaintiff had to make required trial period plan payments and submit signed copies of the loan modification agreement within 14 days. Both individuals were expressly required to sign the modification agreement as borrowers on the mortgage. However, should one of the borrowers not sign, the bank required documentation as to why the signature is not required, as well as a recorded quit claim deed and a divorce decree. The plaintiff acknowledged that she refused to return a fully signed loan modification agreement or provide alternative supporting documentation, and during trial, both individuals admitted that the husband refused to sign. The borrowers eventually consented to final judgment in the foreclosure action and the property was sold.
The plaintiff then brought claims under ECOA and RESPA. The district court granted summary judgment to the defendant on the ECOA discrimination claim and the RESPA claim. After a bench trial on the ECOA notice claim, the district court determined that because the defendant gave proper notice to the plaintiff as required by ECOA (i.e., she was provided required written notices within 30 days after being verbally informed that her modification agreement was not properly completed), plaintiff’s claim failed on the merits.
On appeal, plaintiff argued, among other things, that the district court erred in granting summary judgment in favor of the defendant on her ECOA discrimination claim. The 11th Circuit explained that under ECOA it is unlawful for a creditor to discriminate against an applicant on the basis of marital status. However, ECOA and Regulation B also establish “exceptions for actions that are not considered discrimination, including when a creditor may require a spouse’s signature,” and include additional exceptions to creditor conduct constituting “adverse action” (i.e. “any action or forbearance taken with respect to an account that is delinquent or in default is not adverse action”). The appellate court held that because the plaintiff had defaulted on the mortgage at the time the loan modification was offered, ECOA and Regulation B’s anti-discrimination provision against requiring spousal signatures did not apply to her. Moreover, even if the provision was applicable in this instance, the appellate court held that “the district court correctly concluded that it was reasonable for [defendant] to require either [plaintiff’s] signature or a divorce decree in light of Florida’s homestead laws,” and that such a requirement does not constitute discrimination under ECOA.
As to the notice claim, the appellate court found no error in the district court’s conclusion that the defendant had satisfied applicable notice requirements by timely sending a letter to the plaintiff that (i) specified the information needed from the plaintiff; (ii) designated a reasonable amount of time within which to provide the information; and (iii) informed the plaintiff that failure to do so would result in cancellation of the modification. This letter satisfied the “notice of incompleteness” requirements of 12 C.F.R. § 202.9(c)(2).
On February 9, the FTC announced it recently provided the CFPB with its annual summary of activities related to ECOA enforcement, focusing specifically on the Commission’s activities with respect to Regulation B. The summary discussed, among other things, the following FTC enforcement, research, and policy development initiatives:
- Last June, the FTC released a report to Congress discussing the use of artificial intelligence (AI), and warning policymakers to use caution when relying on AI to combat the spread of harmful online conduct. The report also raised concerns that AI tools can be biased, discriminatory, or inaccurate, could rely on invasive forms of surveillance, and may harm marginalized communities. (Covered by InfoBytes here.)
- The FTC continued to participate in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and federal banking regulatory agencies. The Commission also continued its participation in the Interagency Fair Lending Methodologies Working Group to “coordinate and share information on analytical methodologies used in enforcement of and supervision for compliance with fair lending laws, including the ECOA.”
- The FTC initiated an enforcement action last April against an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. In October, the FTC initiated a second action against a different auto dealer group and two of its officers for allegedly engaging in deceptive advertising and pricing practices and discriminatory and unfair financing. (Covered by InfoBytes here and here.)
- The FTC engaged in consumer and business education on fair lending issues, and reiterated that credit discrimination is illegal under federal law for banks, credit unions, mortgage companies, retailers, and companies that extend credit. The FTC also issued consumer alerts discussing enforcement actions involving racial discrimination and disparate impact, as well as agency initiatives centered around racial equity and economic equality.
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.
On July 27, the CFPB and the DOJ jointly filed a lawsuit against a Delaware-based mortgage lender for engaging in unlawful discrimination. The complaint, filed in the U.S. District Court for the Eastern District of Pennsylvania, alleges that the defendant violated the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B and the Consumer Financial Protection Act (CFPA) by, among other things, engaging in unlawful discrimination on the basis of race, color, or national origin against applicants and prospective applicants, including by redlining majority-minority neighborhoods, and by engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit. The DOJ also alleged a violation of the Fair Housing Act, including the “making unavailable or denial of dwellings to persons because of race, color, and national origin,” among other things.
The proposed consent order, if entered by the court, would be Bureau’s first nonbank mortgage redlining resolution. It would require the defendant, among other things, to: (i) deposit $18.4 million into a loan subsidy program; (ii) pay a $4 million penalty to the Bureau; and (iii) pay $2 million to fund advertising to generate applications in redlined areas. The proposed order also notes the defendant neither admits nor denies the allegations in the complaint. According to a statement released by CFPB Director Rohit Chopra, the Bureau “will continue to seek new remedies to ensure all lenders meet and fulfill their responsibilities and obligations and the CFPB continues to be on the lookout for emerging digital redlining to ensure that discrimination cannot be disguised by an algorithm.”
On May 26, the CFPB released Circular 2022-03 to reiterate creditors’ adverse action notice requirements under ECOA. The Circular, among other things, explains that ECOA and Regulation B require companies to explain the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms. Specifically, the Circular stated that “[l]aw-abiding financial companies have long used advanced computational methods as part of their credit decision-making processes, and they have been able to provide the rationales for their credit decisions.” While the Bureau recognized that some creditors “make credit decisions based on the outputs from complex algorithms, sometimes called ‘black-box’ models,” it stressed that the adverse action notice requirements of ECOA and Regulation B apply equally to all credit decisions, regardless of the technology used to make them. The Bureau expressed that “the reasoning behind some of these models’ outputs may be unknown to the model’s users, including the model’s developers,” and that “with such models, adverse action notices that meet ECOA’s requirements may not be possible.” The Bureau further explained that, “[c]reditors cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations.” Stated differently, a “creditor cannot justify noncompliance with ECOA and Regulation B’s requirements based on the mere fact that the technology it employs to evaluate applications is too complicated or opaque to understand.”
On May 9, the CFPB issued an advisory opinion to affirm its interpretation that ECOA bars lenders from discriminating against customers after they have applied for and received credit, not just during the application process. The Bureau’s opinion and analysis interprets ECOA and its implementing rule, Regulation B, as applying to the “approval, denial, renewal, continuation, or revocation of any open-end consumer credit account,” and is consistent with the agency’s joint amicus brief filed last December with the DOJ, Federal Reserve Board, and FTC, which argued that the term “applicant” as used in ECOA/Regulation B, includes both those seeking credit, as well as persons who have sought and have received credit (i.e., current borrowers). (Covered by InfoBytes here.) This has been the agency’s “longstanding position,” the Bureau stressed, noting it was the view of federal agencies prior to the Bureau’s creation as well.
However, “[d]espite this well-established interpretation, the Bureau is aware that some creditors fail to acknowledge that ECOA and Regulation B plainly apply to circumstances that take place after an extension of credit has been granted, including a revocation of credit or an unfavorable change in the terms of a credit arrangement,” the advisory opinion stated, explaining that ECOA prohibits creditors from lowering a borrower’s available line of credit or subjecting a borrower to more aggressive collections practices on a prohibited basis, such as race or national origin. “In addition, the Bureau is aware that some creditors fail to provide applicants with required notifications that include a statement of the specific reasons for the adverse action taken or disclose an applicant’s right to such a statement.” Creditors are required to provide “adverse action notices” when denying a loan, the Bureau wrote, adding that these notices are required when the terms of an existing loan are modified or terminated. “This interpretation of ECOA, therefore, forecloses a potential loophole that could effectively swallow much of the Act. Such a loophole would be plainly inconsistent with ECOA,” the advisory opinion stressed. While the Bureau acknowledged that “a few other district court decisions have interpreted ‘applicant’ to include only persons actively seeking credit,” the agency stressed that the district courts “read ‘applicant’ in isolation instead of reading this statutory term in context, as required by the Supreme Court,” and that “no court of appeals has endorsed these district courts’ narrow reading.”
As previously covered by InfoBytes, the Bureau finalized its Advisory Opinions Policy in 2020. Under the policy, entities seeking to comply with existing regulatory requirements are permitted to request an advisory opinion in the form of an interpretive rule from the Bureau (published in the Federal Register for increased transparency) to address areas of uncertainty.
On April 29, the CFPB released Spanish translations for certain model and sample forms included in the Prepaid Rule in Regulation E and for certain adverse action model and sample notices included in Regulation B. According to the Bureau, the release is part of its continuing effort to ensure fair access to competitive and transparent markets for all consumers. The Bureau also reminded financial institutions of their obligation to serve the communities where they conduct business, which includes communities with limited English proficiency, in addition to encouraging the use of the translations as they work with Spanish-speakers.
On February 22, the CFPB, DOJ, FDIC, Fed, FHFA HUD, OCC, and NCUA released an interagency statement “to remind creditors of the ability under [ECOA] and Regulation B to establish special purpose credit programs [(SPCPs)].” The statement points creditors to the CFPB’s December 2020 Advisory Opinion on SPCPs, which clarified (i) the content that a for-profit organization must include in a written plan that establishes and administers a SPCP under Regulation B; and (ii) the type of research and data that may be appropriate to inform a for-profit organization’s determination that an SPCP is needed to benefit a specified class of persons. The statement highlights December 7, 2021 HUD guidance, which concluded that SPCPs “instituted in conformity with ECOA and Regulation B generally do not violate the FHA,” conveying that SPCPs may also be appropriate avenues to expand credit access in mortgage lending. This was reiterated in a post released by the CFPB, stating that the “[interagency] statement [on SPCPs] calls attention to these programs as one way to expand access to critical financial services, including mortgage lending.”