This week, the Seventh Circuit Court of Appeals has a chance to reverse a dangerous decision that gives lenders the license to discriminate. To honor the clear intent of Congress, the Court must side with the Consumer Financial Protection Bureau (CFPB). If the CFPB’s appeal is not granted, the case could roll back decades of progress in fighting discrimination.
Racially Disparaging Remarks in the Townstone Financial Show
The case concerns the comments made on the Townstone Financial Show, a weekly AM radio call-in show in Chicago sponsored by Townstone Financial, where the hosts took calls to discuss mortgage-related topics. The show had two co-hosts: Townstone’s CEO and a senior loan officer. The show was an important aspect of Townstone’s business, as ninety percent of the company’s loan applicants heard about Townstone from the radio.
In 2020, the CFPB filed the first-ever redlining complaint against a non-bank mortgage lender, alleging the remarks by Townstone executives were discriminatory under ECOA and Regulation B. Subsequently, the US District Court for the Northern District of Illinois granted Townstone’s motion to dismiss the complaint, asserting that ECOA only applies to applicants. That the CFPB brought the case under the leadership of Director Kathy Kraninger, a Republican official who served during the Trump Administration, underscores the extreme nature of the Northern District’s decision.
On Friday, the Seventh Circuit Court of Appeals will hear arguments from the CFPB to reverse the Northern District’s decision.
The attorneys from the Pacific Legal Foundation representing Townstone want to narrow the set of actions that can constitute grounds for a discrimination claim under the Equal Credit Opportunity Act (ECOA) and Regulation B. They excuse racially-motivated disparaging remarks about Black neighborhoods from Townstone executives as “lunk-headed attempts at humor” and ignore their practical effects.
The CFPB alleges that statements made routinely in the show discouraged Black consumers from applying for credit from Townstone Financial.
In the show, the CEO referred to the neighborhood surrounding a grocery store as “a scary place” and the store itself as the “Jungle Jewel,” where patrons “were people from all over the world.” On a different episode, the CEO said Friday to Monday on the Southside of Chicago is “hoodlum weekend” where the police are “the only ones keeping that [area from] turning into a real war zone and keeping it where it’s kind of at.” When a male caller from Markham, Illinois, a city where more than 80 percent of the population is Black, asked how to improve their credit, the host told the caller, “[you’ve] got to keep those women in line in Markham,” and that generally, “it’s crazy in Markham on weekends….you drive very fast through Markham…don’t look at anybody or lock on anybody’s eyes in Markham.” On one occasion, a co-host advised sellers to “take down the Confederate flag.”
Not surprisingly, Townstone’s lending practices were not equitable. Even though Black households comprise 30 percent of Chicago’s population and almost ten percent of its mortgage applicants, Townstone received only 1.4 percent of applications from Black households. Approximately two percent of applicants came from majority-Black census tracts, even though 18.7 percent of Chicago census tracts have that profile. Townstone employed 17 mortgage loan officers during the years when the show ran, but not one was Black. All it took to ensure Black households didn’t apply was to send the message they weren’t welcome – turning them down wasn’t necessary.
The Decision Is Very Significant for the Future Enforcement of Fair Lending Laws
If affirmed, the Townstone decision would permit lenders to discourage prospective applicants in protected classes from applying for credit. In effect, lenders could put up signs saying Black households were not welcome, and unless those prospective applicants chose to apply anyway, no discrimination could have occurred.
Regulation B, which implements ECOA, prevents creditors from making any “statement … to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”[1] Any view that Regulation B fails to interpret Congress’ intent, which states that it is “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction,”[2] lacks merit. As well, Congress gave the Federal Reserve (the authorized agency for ECOA until 2009) permission to use its “judgment” to make regulations to “prevent circumvention or evasion” of the law.
The fact that events in the case have occurred in Chicago adds a sad irony, as it is a city with a long history of racial discrimination in lending and exclusion in housing. White residents excluded Black residents from their neighborhoods based on racially-biased real estate covenants, white mob violence, as well as government-mandated redlining policies at the Federal Housing Administration (FHA). Moreover, using “blockbusting” techniques to stimulate white flight, speculators often bought properties at distressed prices and flipped them to Black households at significant profits.
In the late 1960s, Black residents in Chicago established the Contract Buyers League (CBL) in response to these issues. Because of the attention brought by the CBL and subsequent organizing in Chicago, Congress passed a series of laws to outlaw discrimination. The Fair Housing Act (1968), ECOA (1974), and Community Reinvestment Act (1977) each address core elements of the problems that perpetuated systemic racism. When communities in the same West Side neighborhoods organized to fight redlining, it led to the passage of the CRA.[3]
Townstone’s perverse theory represents the next stage in a coordinated effort by a network of conservatives to use free speech protections to strip away anti-discrimination laws. In 303 Creative LLC v. Elenis, lawyers successfully argued that a baker could deny services to a same-sex couple on the grounds that doing so was a form of free speech. Townstone is another expansion of a strategy to permit discrimination.
CFA strongly rejects the decision by the Northern District, as it will encourage more discrimination, and supports the CFPB’s efforts to have the decision reversed. The authors of the US Constitution held that “all men are created equal.” To honor their vision and preserve subsequent victories against discrimination, Townstone must be reversed.
[1] 12 C.F.R. § 1002.4(b).
[2] 15 U.S.C. § 1691(a).
[3] Of note, because banks will still have community reinvestment obligations, regulations will prevent them from redlining. As well, Illinois has recently passed a state CRA law that applies to non-bank mortgage lenders like Townstone. But if Townstone isn’t reversed, some communities may be susceptible to losing access to capital from non-bank lenders.