On July 15, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) filed a lawsuit against Townstone Financial, Inc. (“Townstone” or the “Company”), a Chicago-based mortgage lender and mortgage broker, alleging that Townstone “redlined” African-American neighborhoods in the Chicago Metropolitan Statistical Area (“MSA”) and discouraged prospective applicants from applying to Townstone for mortgage loans on the basis of race.1 This marks the first time that a federal regulator has taken a public redlining action against a non-bank mortgage lender.
In its complaint, the CFPB departs from the historic practice of leveraging banks’ obligations under the Community Reinvestment Act (“CRA”) to support redlining allegations and instead argues that the “totality of the circumstances” evidences unlawful redlining. This complaint underscores what the Bureau has stated publicly—redlining is a key area of focus under the CFPB’s current leadership.2 Moreover, it is a warning shot for non-bank mortgage companies, which increasingly originate more mortgages by volume annually than depository institutions.
The CFPB’s Allegations
The Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, prohibit creditors from discriminating against an applicant in any aspect of a credit transaction on a prohibited basis, including on the basis of race.3 This prohibition includes statements, acts, or practices that would discourage a reasonable applicant or prospective applicant, on a prohibited basis, from applying for credit.4 According to the Department of Justice (“DOJ”), “redlining” is a term used to describe “an illegal practice in which lenders intentionally avoid providing services to individuals living in predominantly minority neighborhoods because of the race of the residents in those neighborhoods.”5
In its complaint, the CFPB raises three primary types of allegations to support its claim that, from 2014 to 2017, Townstone acted to meet the credit needs of non-minority neighborhoods within the Chicago MSA while avoiding the credit needs of predominantly African-American neighborhoods. First, the CFPB alleges that the Company’s owners and other senior management made disparaging remarks about African-Americans, predominantly African-American neighborhoods and women, on “The Townstone Financial Show,” an AM radio show and podcast. The CFPB’s complaint cites to five instances from 2014 to 2017 in which a member of the Company’s senior management made comments on The Townstone Financial Show that the CFPB believes would discourage prospective applicants from applying to Townstone for mortgage loans on the basis of race or the racial composition of the neighborhood. For instance, on one episode, Townstone’s CEO and owner allegedly stated that the South Side of Chicago between Friday and Monday is “hoodlum weekend” and that the police are “the only ones between that turning into a real war zone and keeping it where it's kind of at.”6 The CFPB alleges that statements such as these would discourage prospective applicants living on Chicago’s South Side from applying to Townstone for mortgage loans and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties on the South Side.7 In response to the allegations, Townstone has asserted that it is being punished for voicing conservative political speech.8
The CFPB's second category of allegations focused on Townstone's failure to affirmatively market to African-Americans and its failure to employ any African-American loan officers. Specifically, the CFPB alleged that Townstone “made no effort to market directly to African-Americans” even though African-Americans make up 17 percent of the population of the Chicago MSA.9 By the CFPB's own admission, however, Townstone broadcast its radio show throughout the entire Chicago MSA, made it available online as a podcast and shared it widely on social media through Townstone’s Facebook, Twitter and LinkedIn accounts. Marketing-related allegations in past redlining actions generally have focused on claims that the target bank either excluded majority-minority areas from its marketing strategies or selectively included predominantly white areas (for example, for pre-screened offers of credit). Here, the CFPB only alleges that Townstone did not affirmatively conduct targeted marketing to African-American consumers, not that it selectively included or excluded certain geographies from its marketing strategy.
The CFPB also noted that Townstone employed 17 loan officers during the applicable period, but none of them were African-American.10 Although the CFPB implies that the demographics of Townstone’s salesforce evidences a failure to serve African-American communities, the Bureau’s complaint does not allege that the Company discriminated against any actual mortgage loan applicants on the basis of race or ethnicity. For example, in a previous redlining action, the Bureau used testers to bolster its claims of redlining by alleging that African-American testers were treated less favorably than similarly situated white testers when attempting to apply for mortgage loans at bank branches.11
The third category of CFPB allegations focused on statistical analysis of Townstone's mortgage loan application volume. Townstone is a relatively small mortgage company, receiving an average of 740 mortgage loan applications each year during the applicable time period. The complaint asserts that, during the relevant period, Townstone received between 1.3 percent and 2.3 percent of its applications for properties in majority-African-American neighborhoods compared to between 7.6 percent and 8.2 percent by “peer” lenders.12 In other words, Townstone’s peer lenders allegedly received between 3.6 and 6.2 times more mortgage loan applications from majority-African-American areas in the Chicago MSA than did Townstone.13 One of the most challenging aspects of conducting a market penetration analysis is properly defining peer lenders. For example, is it fair to compare the performance of a regional non-bank lender to a national bank with greater brand recognition and marketing resources? Also, mortgage loans in specific census tracts are finite, not infinite. Depository institutions may offer Special Purpose Credit Programs designed to help meet their CRA obligations and it can be difficult for smaller, non-bank lenders to compete for loans in certain areas. It is also notable that the complaint does not include the results of the proportional distribution analysis of Townstone’s mortgage loan originations during the applicable time period, as compared to its peers. Origination data is arguably more indicative of whether an institution is “redlining” than application data because mortgage loan originations demonstrate that an institution is actually serving the credit needs of majority-minority communities.
Based on the above, the CFPB alleges that “the totality of Townstone's statements, acts, and practices,” demonstrate that Townstone redlined African-American neighborhoods in the Chicago MSA and discouraged prospective mortgage applicants on the basis of race.14
A New Redlining Framework
This is the first public redlining action against a non-bank mortgage lender by any federal regulator.15 Although depository institutions have historically originated the vast majority of mortgage loans by volume, in the past decade, non-bank mortgage companies have been increasingly gaining market share.
Because redlining claims have traditionally been brought against depository institutions, regulators have clearly articulated theories of liability they use to bring redlining claims. In the past, regulators have alleged redlining based on (i) statistical allegations and (ii) other factual allegations. The crux of the other factual allegations to support claims of redlining historically have centered on banks’ delineation of their CRA assessment areas. Under the CRA, every depository institution must designate an assessment area or assessment areas.16 Once a depository institution designates its assessment area(s), it must act to serve the credit needs of the entire area – including low- and moderate-income (“LMI”) areas. These areas often overlap with predominantly minority areas.
In the past, redlining cases have included allegations that depository institutions intentionally drew their assessment areas to avoid majority-minority areas and failed to establish or maintain physical branch locations in majority-minority areas. (Notably, this appears to be the first redlining action brought by a federal regulator that does not include allegations related to the locations of physical branches. This could signify the Bureau’s recognition that brick-and-mortar locations are no longer significant drivers of mortgage volume in the digital age.) In bringing redlining cases, the CFPB and DOJ also have looked at larger geographic areas outside of target banks’ designated assessment areas and implied that these areas were the “Proper Assessment Areas.”17 In the CRA context, this concept is referred to as an institution’s Reasonably Expected Market Area (“REMA”). Generally, this refers to situations in which a banking regulator believes that a depository institution’s CRA assessment area is too geographically limited because it arbitrarily excludes LMI areas or does not consist of whole geographies.18 Banking regulators use REMA to demonstrate areas where an institution actually marketed and provided credit as compared to the area where it could reasonably be expected to have marketed and provided credit.19 Because redlining actions against depository institutions have focused on the delineation of an institution’s assessment area, redlining settlements often require depository institutions to expand their assessment areas to include certain majority-minority areas that regulators viewed as improperly excluded.
Unlike banks, non-banks do not have CRA obligations and they have no affirmative legal obligation to lend in any specific geography. As a result, regulators have struggled to develop an appropriate legal framework for bringing redlining claims against non-bank lenders. In its complaint, the CFPB appears to leverage the concepts of a REMA or a “Proper Assessment Area” to suggest that Townstone was required to serve the entire Chicago MSA to the same extent as if it were a designated CRA assessment area. By unmooring itself from the traditional legal framework for redlining allegations against depository institutions, the CFPB endorses a more flexible “totality of the circumstances” framework for redlining allegations against non-banks.
Specifically, in bringing its redlining case against Townstone, the CFPB focused on factual allegations related to marketing and employment practices to support its statistical analysis of Townstone’s mortgage application activity. Although the complaint outlines certain factual allegations related to the potential discouragement of prospective applicants in connection with certain marketing statements, redlining is fundamentally about the refusal to do business in majority-minority geographies. Because most redlining cases ultimately settle, there is very little case law precedent. As a result, it is unclear whether the CFPB’s allegations about the Company’s marketing and employment practices, coupled with its statistical allegations, will be sufficient to prove a redlining claim in a court of law.
Although every redlining action is based on unique facts and circumstances, this case should be followed closely for several reasons. First and foremost, this is the first public redlining case to be brought against a non-bank lender and provides insight into the CFPB’s framework for analyzing redlining claims against non-banks. This case also demonstrates that small lenders are not immune from redlining claims. Based on this unprecedented action, mortgage lenders should consider risk mitigation strategies to minimize potential redlining risk. Lenders can help mitigate redlining risk by evaluating their market penetration performance and marketing strategies. In the digital age, all forms of marketing may be considered fair game for regulatory scrutiny, including social media activity. Ensuring that advertising and marketing efforts are inclusive and reach residents in majority-minority areas can help mitigate the risk that a lender could be viewed as avoiding the credit needs of such areas. Finally, implementing a strong fair lending compliance management system, including a written fair lending policy, effective fair lending training, and appropriate senior management oversight, can help demonstrate a lender’s commitment to fair lending.
1 Compl., CFPB v. Townstone, Case No. 1:20-cv-04176 (July 15, 2020), available at: https://files.consumerfinance.gov/f/documents/cfpb_townstone-financial_complaint_2020-07.pdf (hereafter, “Complaint”).
2 2019 Fair Lending Report of the Bureau of Consumer Financial Protection, CFPB (April 2020), available at https://files.consumerfinance.gov/f/documents/cfpb_2019-fair-lending_report.pdf.
4 12 C.F.R. pt. 1002, Supp. I, 1002.4(b)(1) (“In keeping with the purpose of the Act—to promote the availability of credit on a nondiscriminatory basis—§ 1002.4(b) covers acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit.”).
5 See Justice Department Settles Suit Against Indiana Bank to Resolve Lending Discrimination Claims, DOJ (June 13, 2019), available at https://www.justice.gov/opa/pr/justice-department-settles-suit-against-indiana-bank-resolve-lending-discrimination-claims
8 See Townstone Financial Fires Back at CFPB Discrimination Lawsuit, Housing Wire (July 17, 2020), available at https://www.housingwire.com/articles/townstone-financial-fires-back-at-cfpb-discrimination-lawsuit.
15 It is also the CFPB's first redlining case under the Trump administration, although the CFPB has only brought two other public redlining case in its history, and those cases were joint efforts that involved the Department of Justice. CFPB v. Hudson City Savings Bank, F.S.B., Case No. 2:15-cv-07056 (D. N.J. Sept. 24, 2015); CFPB v. BancorpSouth Bank, Complaint, Case No. 1:16-cv-118-GHD-DAS (N. D. Miss. June 29, 2016).