Banking and Finance Law Daily Mortgage lender argues for dismissal of CFPB complaint alleging race discrimination
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Tuesday, April 13, 2021

Mortgage lender argues for dismissal of CFPB complaint alleging race discrimination

By Nicole D. Prysby, J.D.

The mortgage lender responded to the Bureau’s argument that Regulation B’s discouragement prohibition is reasonably related to ECOA and applies to prospective applicants.

Townstone Financial, Inc. submitted a memorandum in support of its motion to dismiss claims brought by the Consumer Finance Protection Bureau for violations of the Equal Credit Opportunity Act (ECOA) and Regulation B. Townstone’s memo responds to arguments made by the Bureau as to why the claims should not be dismissed. The Bureau’s complaint against Townstone alleged that Townstone engaged in practices that would discourage prospective applicants, on the basis of race, from applying for credit in the Chicago area. Townstone argued that the claims should be dismissed because the Bureau improperly sought to expand ECOA’s reach to include "prospective applicants" and that the Bureau unconstitutionally sought to regulate the content of protected speech. The Bureau responded that courts have recognized Regulation B’s discouragement provision and have stated that its coverage of prospective applicants is independent of the statute’s definition of "applicants," which governs who can bring private causes of action. The Bureau also argued that neither Regulation B nor its action against Townstone violate the First Amendment, because the speech at issue is commercial speech falling outside the protections of the First Amendment. Townstone argued in its reply that despite the Bureau’s efforts to defend the provision of Regulation B that extends ECOA’s reach to forbid discouraging prospective applicants, it must be invalidated because it contravenes the Administrative Procedures Act (APA) and runs afoul of the First Amendment. Specifically, Townstone argued that the legislative history of ECOA provides no support for the Bureau’s position, because it indicates that Congress was focused solely on "applicants." In addition, the discouragement provision violates the First Amendment, because the discouragement provision, which treats everyone as a "prospective applicant," is not a conduct regulation that incidentally burdens speech, but it is a direct, content and viewpoint-based burden on speech itself.

Complaint and motion to dismiss. The Bureau alleged that Townstone violated ECOA and Regulation B by engaging in unlawful discrimination, including practices that would discourage prospective applicants, on the basis of race, from applying for credit in the Chicago area. The Bureau alleged that Townstone markets through a radio infomercial that regularly includes statements that would discourage African-Americans prospective applicants from applying for mortgage loans. Townstone and its owner motioned to dismiss the Bureau’s complaint. Specifically, Townstone asserted that the Bureau improperly sought to expand ECOA’s reach to include "prospective applicants." Townstone also argued that contrary to the First Amendment, the Bureau unconstitutionally seeks to regulate the content and viewpoint of protected speech. The Bureau responded (see Banking and Finance Law Daily, March 16, 2021), arguing that Regulation B’s discouragement prohibition helps to fulfill ECOA’s goals, and therefore is "reasonably related" to ECOA and should be upheld by the court. The Bureau also argued that neither Regulation B nor its action against Townstone violate the First Amendment, as the speech at issue is commercial speech falling outside the protections of the First Amendment.

Defendants’ memo. Townstone argued in response that despite the Bureau’s efforts to defend the provision of Regulation B that extends ECOA’s reach to forbid discouraging prospective applicants, it must be invalidated because it contravenes the APA and runs afoul of the First Amendment. Specifically, Townstone argued that the general rulemaking authority of ECOA does not give the Bureau the authority to regulate activity beyond the bounds of the statute. Contrary to precedent cited by the Bureau, the legislative history of ECOA provides no support for the Bureau’s position. ECOA’s legislative history indicates that Congress was focused solely on "applicants." In addition, the language used in the ECOA statutory scheme makes clear that Congress intended the statute to reach conduct affecting "applicants," by not using any language that would extend its prohibitions to "prospective," "potential," or "possible" applicants. Congress has never acquiesced to the extension of ECOA to forbid discouraging prospective applicants. And, despite the Bureau’s argument that it is not attempting to create affirmative obligations, that is exactly what it is doing. The Bureau is attempting to create obligations for creditors to hire loan officers from, market to, and have business success with all demographics in their markets, in spite of ECOA only prohibiting "discrimination."

Townstone also argued that the discouragement provision violates the First Amendment. The challenged statements, argued Townstone, include political statements such as opposition to high crime rates and therefore restrictions on that speech should be subject to heightened scrutiny. Nor should Townstone be published for sponsoring political discussion. According to the response, the discouragement provision, which treats everyone as a "prospective applicant," is not a conduct regulation that incidentally burdens speech, but it is a direct, content and viewpoint-based burden on speech itself. Townstone’ speech cannot be "commercial speech" because it does not propose a commercial transaction. The discussions regarding political and societal issues between Townstone’s employees are not commercial speech despite the fact that they occurred on a Townstone-sponsored program.

Companies: Townstone Financial, Inc.

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