The CFPB’s first lawsuit against a nonbank mortgage lender for redlining has been dismissed by
an Illinois federal Court. The Court held that the protections offered to actual loan applicants are
not extended to prospective applicants. Bureau of Consumer Fin. Prot. V. Townstone Fin., Inc.,
2023 U.S. Dist. LEXIS 18405, 2023 WL 1766484 (N.D. Ill. Feb. 3, 2023).

The lawsuit, brought by the CFPB back in 2020, argues that Townstone Financial, Inc.
(“Townstone”) violated Equal Credit Opportunity Act (“ECOA”) by engaging in redlining of a
predominantly African-American Chicago neighborhood. The redlining claims stemmed from
comments made on a financial advice radio program Townstone launched. The CFPB took the
position that these comments would discourage prospective applicants, on the basis of race, from
applying for credit.

The CFPB is charged with enacting and enforcing regulations to implement the ECOA. While the
ECOA makes it illegal for mortgage lenders to discriminate against any applicant for credit on the
basis of race, the ECOA’s implementing regulation, Regulation B, seeks to extend that ban to any
statements that would discourage on a prohibited basis a “prospective applicant” from applying
for credit.

In Townstone’s Motion to Dismiss, the lender argued the CFPB was attempting to expand the
reach of the ECOA to prospective applicants when the ECOA clearly only applies to discrimination
against actual applicants. The Court agreed. Pointing to the fact that the ECOA never refers to
conduct prior to the application, the Court stated, “the CFPB cannot regulate outside the bounds
of the ECOA, and the ECOA clearly marks its boundary with the term ‘applicant.'”
While the CFPB’s authority to prohibit redlining of prospective applicants under the ECOA has
been rendered null by this Court, it is imperative lenders remain cognizant of other federal statutes
that may apply to prospective applicants.