Sticks and stones can break bones, but words can violate the Equal Credit Opportunity Act (ECOA) when they discourage prospective applicants from applying for credit.
That’s the ruling of the Seventh Circuit Court, which struck down a decision from a lower court that said ECOA only protects credit applicants, not prospective applicants. The ruling is a boon to the Consumer Financial Protection Bureau (CFPB) and its fair lending enforcement powers.
The Lawsuit that Started It All
It began in 2020, when the CFPB filed a lawsuit against a Chicago mortgage company that failed to attract mortgage applicants in African-American neighborhoods. While African Americans made up 9.8% of mortgage applicants at peer lenders, they were just 1.4% of the mortgage company’s applicants. (The few applicants from African-American neighborhoods were mostly non-Hispanic and white .) Meanwhile, the company didn’t market to African-American neighborhoods and none of its 17 loan officers during 2014-2017 were African American.
The CFPB alleged that the lender, Townstone Financial, violated ECOA and the Consumer Financial Protection Act of 2010.
It sounds like a typical redlining fair lending case – until you get into the details. The CFPB alleged that Townstone Financial had so few applicants because the company’s owner and loan officers racially disparaged black neighborhoods on the company’s infomercial radio show. The CFPB said the comments illegally discouraged potential African-American mortgage loan applicants – especially since 90% of applicants came from the company’s radio show and other radio ads.
Related: Recent Trends in Fair Lending Compliance
The case was dismissed in 2023, with the court finding in favor of Townstone based on a narrow interpretation of ECOA’s definition of a credit applicant. The court also found the CFPB didn’t have the authority to prohibit discouraging potential applicants.
As many expected, the CFPB appealed the court’s decision.
In July 2024, the appeals court reversed the decision and found in favor of the CFPB’s enforcement authority, ruling that the ECOA makes creditors liable for both outright applicant discrimination and actions that discourage prospective applicants from applying for credit. Reading ECOA as a whole and not just an interpretation of a definition, it seems clear that “prospective” does play a part.
“Regulation B applies to all persons who, in the ordinary course of business, regularly participate in thecredit decision, including setting the terms of the credit. The term “creditor” includes a creditor’s assignee, transferee, or subrogee who so participates. For purposes of discrimination or discouragement, 12 CFR 1002.4(a) and (b), the term creditor also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made.”
It’s unclear if Townstone will continue to pursue the case and if the overturn of Chevron doctrine, might impact the case. For now, the ruling stands.
What Does the Case Mean for Fair Lending Enforcement?
The case offers two key fair lending enforcement takeaways:
- A broad interpretation of ECOA: The court emphasized that the ECOA should be broadly interpreted to fulfill its purpose: preventing discrimination in credit transactions. The decision underscores the ECOA's scope in prohibiting discrimination "with respect to any aspect of a credit transaction." In other words, actions taken before a formal application is submitted can still be viewed as discriminatory and a violation of ECOA.
- CFPB has strong fair lending enforcement powers. The ruling empowers the CFPB to take action against lenders who engage in practices that could discourage protected classes from applying for credit. This could lead to increased scrutiny of marketing, advertising, and public statements made by lenders and how these communications may impact prospective borrowers.
Related: 3 Ways Marketing Plays a Key Role in Fair Lending Compliance
We’ve said it before, and now we’ll say it again:
Marketing teams need to evaluate how and where they market and how these activities influence who applies for loans. This includes regular assessments of the marketing budget and efforts, including the mediums used and targeted geographic areas.It is crucial to involve the compliance team in these evaluations and have them perform reviews of the materials to ensure adherence to fair lending practices and to conduct thorough redlining reviews. By collaborating with compliance, marketing strategies can be aligned with regulatory requirements, mitigating risks and promoting equitable access to loan products.
Is your applicant pool reflective of your market's demographics? If not, your marketing strategies might not be reaching all community members, particularly those in low-to-moderate income (LMI) and majority-minority neighborhoods. Fair lending analytics are essential to these efforts. are essential to these efforts.
This consideration extends to third-party vendor management and oversight of those marketing on behalf of your organization. If a vendor's activities lead to unbalanced outreach that excludes protected groups, it could attract regulatory scrutiny. For instance, a recent redlining enforcement action highlighted a lender that used only white non-Hispanic models and loan officers in its marketing campaigns.
Now that the CFPB clearly has the authority to assess how communications impact potential applicants – and not just actual applicants – assume it will continue to examine "decision-making in advertising, pricing, and other areas" to ensure companies are addressing and correcting discriminatory practices that violate federal laws against unfair practices.
Don’t get caught flat-footed by your marketing and community outreach. Make sure you’re analyzing applicant data and following up if you are falling short compared to your peers when it comes to applications from LMI and majority-minority. Prospective applicants have protections too.
What do the courts have to say about regulations like 1071, CRA and others? Find out in our webinar Mid-Year Regulatory Landscape 2024: 1071, CRA and Other Hot Topics.
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