CHICAGO - A panel of federal appeals court judges have given a green light to federal financial regulators to resume their pursuit of Chicago-based mortgage broker Townstone Financial, as the government agency seeks to punish Townstone and its president for comments Townstone's officers made on the broker's radio show, because the agency says the comments allegedly would discourage black homebuyers from applying for loans.
In a ruling issued July 11, a three-judge panel of the U.S. Seventh Circuit Court of Appeals reversed a Chicago federal district judge's determination that, in their regulatory action against Townstone, the Consumer Financial Protection Bureau had stretched a federal law too far.
In the ruling, authored by Seventh Circuit Chief Judge Diane S. Sykes, the judges said they believed the lower court's ruling sought to impose a "crabbed" reading of "the term 'applicant'" as defined within federal lending law which they said "frustrates the obvious statutorily articulated purpose of the statute."
U.S. Seventh Circuit Court of Appeals Chief Judge Diane S. Sykes
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The case landed in court in 2020, when the CFPB sued Townstone, alleging company officials had effectively discriminated against black borrowers through comments Townstone executives made several years earlier on Townstone radio infomercials.
The agency never has accused Townstone of allegedly discriminating against any actual mortgage applicants on the basis of race or any other factor.
Rather, the complaint centers on statements Townstone CEO Barry Sturner and others associated with Townstone had made in passing on Townstone's weekly radio show.
The CFPB has asserted those statements amounted to discrimination under the federal Equal Credit Opportunity Act, because they could "discourage" black borrowers from applying for loans through Townstone.
Further the CFPB has accused Townstone of not employing enough black loan officers and of not sufficiently advertising its products and services to potential black borrowers.
According to court documents, the alleged discriminatory statements included:
-- In January 2017, Townstone CEO Barry Sturner allegedly related his experiences shopping at “the Jewel on Division” in Chicago. He referred to that particular supermarket as “Jungle Jewel,” adding: “There were people from all over the world going into that Jewel. It was packed. It was a scary place;”
-- In June 2016, Sturner, in discussing “mortgage-lending services that Townstone could provide to police officers and others” described weekends on the South Side of Chicago as “hoodlum weekend,” adding: Police are “the only ones between that turning into a real war zone and keeping it where it’s kind of at;”
-- In November 2017, during a discussion of skydiving and the resulting adrenaline “rush” that follows, a Townstone executive allegedly “suggested that ‘walking through the South Side at 3 a.m. [would] get the same rush;’”
-- In January 2014, in giving advice on how to get a home ready for sale, a former Townstone executive and co-hosts of the Townstone show said home sellers should “change the light fixtures, paint it from top to bottom,” and “take down the Confederate flag;” and
-- In January 2014, Townstone’s former president allegedly told a caller from Markham, a suburban community with a large Black population, that “it’s crazy in Markham on weekends,” and “You drive very fast through Markham … you don’t look at anybody or lock on anybody’s eyes in Markham … You look at your dashboard, you don’t lock on anybody.”
In response to the complaint, Townstown and Sturner have asserted the CFPB's interpretation of the ECOA law amounts to "absurd" and unconstitutional overreach, intended not to remedy discriminatory lending practices, but to silence speech that federal agents find objectionable.
Townstone and Sturner have asserted the regulatory action amounts to a violation of the company's and Sturner's First Amendment rights, as well as regulatory overreach.
The CFPB argued its case is based on a federal regulation, known as “Regulation B,” which they said was enacted under the federal rulemaking process established under the ECOA, and which carries the same weight as the law itself. That regulation empowers federal regulators to take action against lenders who engage in the act of “discouraging … applications for credit.”
In February 2023, U.S. District Judge Franklin Valderrama sided with Townstone and dismissed the CFPB's case. In the ruling Valderrama agreed the CFPB had misapplied the ECOA, saying the law "unambiguously prohibits discrimination of 'applicants,' and not 'prospective applicants.'
"The CFPB cannot regulate outside the bounds of the ECOA, and the ECOA clearly marks its boundary with the term 'applicant,'" Valderrama said in his order dismissing the action.
Valderrama did not address Townstone's claims that application of "Regulation B" in the manner sought by the CFPB in this case would violated the First Amendment, because the judge said Regulation B under the ECOA could not be applied so broadly to include not only actual applicants, but also people who may possibly apply for a loan.
On appeal, Judge Sykes and her Seventh Circuit colleagues on the panel, Judges Kenneth F. Ripple and Ilana D. Rovner, said Valderrama got the law wrong.
They said they believed a reading of the ECOA law "as a whole" and in a "broader context" revealed that Valderrama's interpretation of the term "applicants" was too narrow.
"Reading the statutory language as a whole, including the strong congressional direction that the cognizant agencies and the Department of Justice prevent 'circumvention and evasion,' makes clear that the prohibition against discouragement must include the discouragement of prospective applicants," Sykes wrote.
"... Indeed, the ECOA’s scope of prohibition prohibits discrimination 'with respect to any aspect of a credit transaction,'" Sykes said. "Congress well understood that 'any aspect of a credit transaction' had to include actions taken by a creditor before an applicant ultimately submits his or her credit application."
In the ruling, the appellate judges claimed their decision took into account a relevant recent U.S. Supreme Court decision in the case known as Loper Bright v Raimondo. The Loper Bright decision overturned a legal regime known as "Chevron deference," dating back to a 1984 Supreme Court decision, which had established a system of review that required and conditioned courts to readily accept the interpretation of laws by government regulatory agencies when regulations are challenged in court.
Earlier this month, following the Loper Bright decision, the two sides had filed communications with the Seventh Circuit judges concerning the impact of the Supreme Court ruling on this case.
The CFPB claimed Loper Bright changed nothing, because the CFPB's interpretation of the ECOA law is correct.
Townstone's attorneys, however, asserted Loper Bright backs their contention that Valderrama's decision was correct.
"The Court confirmed that ... it is the duty of courts, not agencies, to say what the law is," wrote Townstone attorney Steven M. Simpson, of the Pacific Legal Foundation.
"What the Court did not do in Loper Bright is usher deference out the front door while surreptitiously escorting it back in through the rear, as CFPB seems to think."
The panel asserted in a footnote that the decision was rendered in keeping with Loper Bright, and was not simply the courts accepting the regulatory agency's claims about the law.
However, the Seventh Circuit appeared to readily accept the CFPB's interpretation of the federal lending discrimination law at the heart of the case.
Like Valderrama, the appeals panel did not address the First Amendment claims directly, saying those were not the subject of the appeal. They said Townstone is free to press that defense as the case continues in Chicago federal district court.
The appellate judges further said their decision does not express any conclusions about the merits of Townstone's First Amendment claims or about the CFPB's case against Townstone specifically.
Townstone's attorneys declined to indicate if they may seek to appeal the Seventh Circuit's ruling further and did not address questions from The Record concerning whether they believed the Seventh Circuit panel had adhered correctly to the Loper Bright decision.
In a statement issued following the ruling, Pacific Legal Foundation Senior Attorney Oliver Dunford said:
“We’re disappointed in the decision, which offered only a cursory analysis of the relevant statutes and ignored completely Townstone’s First Amendment arguments. We are considering our options for further review.”