Townstone Settles-Peak Fair Lending Enforcement?
Enforcement’s Failure
I have written numerous times about the failure of 50 years of fair lending enforcement to move the needle for minority homeownership rates.[1] At this point in time it is safe to conclude that either (a) lenders are undeterred in discriminatory behavior by the monetary penalties and public shame of fair lending enforcement actions or, more likely, (b) intentional (or unintentional) lending discrimination (however defined) is not the cause of disparate homeownership rates. But my observation after 30+ years of working with mortgage lenders is that they want to do every loan they can regardless of any characteristic of the borrower. The only color they see is green. So why does the federal government continue to expend massive resources in pursuit of fair lending enforcement when the homeownership gap is unmoved?[2]
With that as background, on Friday afternoon (November 1, 2024) CFPB’s press office proudly announced, that after 6+ years of negotiations and litigation, “CFPB Takes Action to Address Townstone Financial’s Unlawful Redlining: Settlement follows a significant victory for the CFPB and its fair lending authority in the U.S. Court of Appeals for the Seventh Circuit”. CFPB would like you to believe that this was a huge victory for its fair lending interpretations and enforcement efforts: the kind of consent order guidance CFPB loves to trumpet as tantamount to law.
It most certainly isn’t.
Taking on the bully
As is plainly obvious to anyone who could be accused by the CFPB’s Director of being a leech seeking only to pad their billable hours, Townstone and its owner, Barry Sturner, angered and frustrated the CFPB by not conceding when CFPB sought to sanction him and his company based on claims of redlining arising from allegedly discriminatory things he said on his weekly Chicago AM radio show that supposedly discouraged prospective applicants.[3] So, CFPB not only went after Townstone itself, it also took the unprecedented[4] step of suing Sturner personally.[5]Sturner, it would seem, had unprecedented chutzpah.[6] His unwillingness to concede the CFPB’s allegations were viewed as an affront to the CFPB’s authority, fair lending interpretations, and enforcement policies.[7]
In fact, no other mortgage lender in history has ever dared to challenge the federal government in court in a fair lending case.[8] Every other mortgage lender similarly bullied[9]by fair lending allegations settled[10] to avoid the massive time and expense of litigation with the federal government and the reputational harm of being labeled as being discriminatory and racist. So, for over 50 years, the fair lending laws have been twisted and shaped by the sometimes expansive and aggressive, but always powerful, actions of federal enforcement officials without any judicial oversight to confirm or reject those interpretations. For his “crime” of seeking to defend himself, CFPB seemed determined to paint Sturner with a big scarlet “R” (for racist)[11]deserving of public shame and financial ruin.
Prospective applicants
In addition to the free speech issues which were never addressed by the court, Townstone’s lawyers challenged CFPB’s allegations and interpretations that Townstone was engaged in what the CFPB and Justice Department call modern day redlining. Specifically, for the CFPB to succeed in its claims against Townstone: (i) Reg B (ECOA) must apply to prospective applicants, (ii) all listeners (and potential listeners) to his radio show were Townstone's prospective applicants, and (iii) Sturner’s comments on the show discouraged potential applicants from applying for loans. All of the foregoing would need to be true for the fair lending violation to be found. To be clear, only issue (i) was ever decided in this case.
As it turned out, CFPB initially lost at the District Court level to Townstone on question (i) (whether ECOA protects prospective mortgage applicants as opposed to just actual applicants). But, on appeal by the CFPB, in July 2024, that lower court decision was reversed by the Court of Appeals for the 7th Circuit. The 7th Circuit decided that the better interpretation (in a post-Chevron deference world) was the CFPB’s that ECOA did apply to prospective applicants, sending the case back down to District Court Judge Franklin Valderrama to decide the other two issues and the impact of Sturner’s free speech defenses. That 7th Circuit decision, however, did not decide that Townstone had illegally discriminated at all; only that prospective applicants would be protected from discrimination.[12] Still, it was a win for the CFPB’s interpretation about prospective applicants, whoever they might be. As I was quoted by Rob Chrisman on July 15, 2024, “…, most people would agree that there is something wrong and discriminatory for a lender to be able hang a sign on the door that says something like, “Irish need not apply”. I think that is the kind of prospective applicant discrimination the 7th Circuit had in mind when they reversed the lower court, but, unfortunately, they did not elaborate.
CFPB’s position in modern day redlining cases is that (i) everyone is a prospective applicant under ECOA, (ii) discrimination can be proven based on disparate impact alone (no discriminatory intent is needed), and (iii) the failure to encourage applications is the same as discouraging applications. By settling the Townstone case only the slimmest of victories was preserved for the CFPB with respect to its redlining theories; the CFPB’s authority to pursue ECOA violations on behalf of prospective applicants. But who are the prospective applicants? Further, there is nothing in the Townstone settlement to support disparate impact or CFPB’s modern day redlining view that a lender's failure to take affirmative actions to market to minorities is the same as discouraging applications.
CFPB’s (Pyrrhic?) "win"
So, with the 7th Circuit decision preserved without appeal, any Irish person walking past my “Irish need not apply” sign example can be sure they are safely within the zone of the CFPB’s protected class, but beyond that, who knows? Faced with the Supreme Court’s 2023 decision on discrimination in Harvard University's admissions and a possible Presidential election that could alter the agency’s leadership, CFPB allowed Townstone to settle for a fraction of what was no doubt sought and granted Sturner personally a full dismissal with prejudice. Despite having what would otherwise be overwhelming legal fees essentially covered, faced with a manageable fine and a deal that almost certainly would not be on the table if Kamala Harris wins, Townstone and its owner made a difficult but necessary cost-benefit decision.
CFPB (and the Justice Department), however, refuse to acknowledge that lender discrimination does not explain housing disparities and continue to pursue these modern day redlining claims unabated. But, in my view, the Townstone settlement is an unequivocal recognition by CFPB that its overzealous fair lending interpretations are unlikely to survive judicial challenge.[13] In fact, it's possible we may mark this settlement as the beginning of the end of fair lending enforcement for the mortgage industry as we know it.
[1]See also https://mortgagemusings.com/f/ed-37-the-changing-faces-of-mortgage-banking and various other Musings referenced therein and in this edition. We need better ideas to address the housing disparity because rooting out discrimination is not the answer.
[2] A discussion about the need for victimhood to explain all unequal societal results is beyond the scope of this blog.
[3]Sturner’s lawyers were apparently prepared to provide minority focus group evidence that no one felt “discouraged” by Sturner’s comments and a significant percentage of the focus group asked if they could do business with him.
[4] I am unaware of any other CFPB redlining settlement or other mortgage related fair lending case in which an owner was sought to be held personally liable for the alleged discrimination by the company.
[5] I have also heard rumors about unusual discovery requests from CFPB asking Sturner about Yiddish words. Can't they use Google Translate at the CFPB?
[6] “Temerity” might have been a better word choice given footnote 4 above. Sturner also had the extremely good fortune to have the Pacific Legal Foundation supporting his defense. PCL bills itself as, “Suing the government since 1973: We stand as a powerful champion for Americans like you, fighting back against the government when it abuses your rights.” Fellow regulatory attorney “leeches”, Marx Sterbcow and Rich Horn as well as non-leech Sean Burke also deserve kudos for their work on this case.
[7]The Justice Department declined to prosecute Townstone under its own fair lending authorities.
[8] With these Wall Street Journal reported comments, I’m looking at you to step up, Jamie Dimon.
[9] It is impossible to really know the facts of whether a company “deserves” to be brought to task for its minority lending based on reading consent orders. Still, there is no question that the federal government can and does seek to bully its enforcement targets. A 100% rate of settlement is a batting average that defies any other explanation. The costs of defense simply never pencil out for all fair lending defendants to date. I’m still looking at you, Jamie Dimon, but Rocket Mortgage’s billionaire owner, Dan Gilbert, has been known to throw down with the federal government. God bless him.
[10] Just recently Fairway Independent Mortgage settled with the CFPB for similar modern day “redlining” claims.
[11] Some have suggested that “R” was actually for “Republican”.
[12]It remained to be determined who qualifies as a prospective applicant and whether there was discouragement.
[13]Or perhaps a Trump administration.
Brian Levy is an attorney with Katten & Temple, LLP licensed in Illinois and Wisconsin who writes the free Levy’s Mortgage Musings blog available at www.mortgagemusings.com. Mr. Levy can be reached by email at blevy@kattentemple.com. Mr. Levy’s blog is copyrighted and presented by Chrisman Commentary with permission. All rights are reserved.