Recently, the Consumer Financial Protection Bureau (“CFPB”) brought its first ever redlining case against a non-depository institution. While the CFPB has yet to issue guidance regarding how it would evaluate a non-bank lender’s activities for potential redlining, the CFPB’s allegations in this case provide some insight to mortgage lenders regarding compliance expectations.
On July 15, 2020, the CFPB filed a complaint in the U.S. District Court for the Northern District of Illinois against Townstone Financial, Inc. (“Townstone”), alleging that the mortgage lender engaged in the redlining of African-American neighborhoods in the Chicago Metropolitan Statistical Area (“MSA”) in violation of the Equal Credit Opportunity Act (“ECOA”) and, in turn, the Consumer Financial Protection Act (“CFPA”).
The complaint does not assert any claims under the Fair Housing Act (“FHA”), as that fair lending statute is enforced by the U.S. Department of Housing and Urban Development (“HUD”) and the U.S. Department of Justice (“DOJ”). Typically, “redlining” refers to a specific form of discrimination whereby the lender provides unequal access to, or unequal terms of, credit because of the prohibited basis characteristics of the residents of the area in which the loan applicant resides or in which the residential property to be mortgaged is located.
According to the complaint, during the January 1, 2014 to December 31, 2017 time period, Townstone “engaged in unlawful redlining and acts or practices directed at prospective applicants that would discourage prospective applicants, on the basis of race, from applying for credit in the Chicago MSA.” In support of this claim, the CFPB asserts that Townstone’s weekly marketing radio shows and podcasts included statements about African Americans and predominantly African-American neighborhoods (using terms such as “scary” and “jungle”) that would discourage African-American prospective applicants from applying to Townstone for mortgage loans.
Lack of Direct Marketing
Apart from the allegations regarding Townstone’s radio shows and podcasts, the complaint does not point to any intentional conduct or effort by Townstone to discriminate against African Americans or African-American neighborhoods. Rather, the complaint arrives at a general conclusion that Townstone “made no effort to market directly to African Americans.” In support of this statement, the CFPB notes that Townstone did not specifically target any marketing toward African-Americans and did not employ an African-American loan officer among its 17 loan officers in the Chicago MSA. As a result, Townstone received few applications from African-Americans and only a handful of applications from residents of majority African-American neighborhoods.
However, with respect to the allegation that Townstone did not specifically target any marketing toward African-Americans, the CFPB concedes that Townstone generated 90% of its applications from radio advertising on an AM radio station that “reached the entire Chicago MSA” and thus included residents of majority African-American neighborhoods. Further, with respect to the allegation that Townstone did not employ any African-American loan officers, it is unclear how the CFPB expects that the race of a particular loan officer would have increased the number of applications from members from the same racial group, since Townstone’s business model relied upon leads received through radio advertising rather than referrals.
HUD and DOJ brought early redlining cases under a disparate treatment theory of discrimination, which requires evidence of a lender’s discriminatory motive or intent. More recently, federal regulatory agencies have based redlining claims on statistical evidence that demonstrates a lender’s failure to market to, and infiltrate, geographic areas that have a strong minority presence.
As further support for its claim against Townstone, the CFPB cites to data comparing the loan applications received by Townstone with those of its peer mortgage lenders. While only 1.4% of the loan applications received by Townstone were from African Americans, the average among peer lenders was 9.8%. Similarly, only between 1.4% and 2.3% of Townstone’s loan applications came from majority African-American neighborhoods, while the average among peer lenders was between 7.6% and 8.2%. In further support of its claim, the CFPB argues that African Americans make up approximately 30% of the population of Chicago, though fails to note the Chicago MSA’s African-American population of approximately 16%.
Given this data, the complaint asserts that Townstone acted to meet the credit needs of majority-white neighborhoods in the Chicago MSA while avoiding the credit needs of majority African-American neighborhoods. As a result, the CFPB alleges that Townstone thereby discouraged prospective applicants from applying to Townstone for mortgage loans in those neighborhoods.
In response to the allegations, Townstone has published a fact sheet defending itself against the CFPB’s claim and noting its efforts to “reach as broad a geographic area as possible” by considering legitimate, non-discriminatory factors such as signal strength, and referencing other marketing measures specifically targeted at the African-American community. Further, Townstone has hired a third-party expert to help demonstrate how Townstone is not an outlier among its peers.
The complaint illustrates the CFPB’s position that non-bank lenders can be held liable for redlining even though they are not subject to Community Reinvestment Act requirements regarding meeting the needs of an entire assessment area. Further, the complaint reminds lenders that their performance – measured primarily by number of loan applications received – will be compared against that of other lenders with similar size and loan origination volume. As such, lenders seeking to mitigate fair lending risk should evaluate the geographic distribution of their lending activity to determine whether, during a particular time period, they were significantly less likely to take loan applications from minority areas than non-minority areas.
CFPB’s Pursuit of Redlining Claim
More importantly, the complaint demonstrates the CFPB’s willingness to pursue a redlining claim absent the traditional allegation that the lender sought to draw a “red line” around a particular demographic group or geographic area. Townstone’s radio advertising was not restricted to a particular demographic group or geographic area, nor could Townstone have altered the radio signals somehow to include or exclude particular groups or geographic areas. Further, Townstone had no control over the demographics of the AM radio station’s audience or that of particular radio shows.
Rather than alleging a traditional claim of redlining (i.e., actively avoiding a particular demographic group or geographic area), the CFPB seeks to hold Townstone liable for failing to conduct affirmative outreach and marketing to African-Americans. For example, the CFPB points out that Townstone had no African-American loan officers. Yet a lender’s failure to perform affirmative outreach to certain demographic groups or geographic areas, including by hiring loan officers of a particular demographic group, does not constitute redlining – nor are such actions required by ECOA.
The only allegation that Townstone redlined, in the traditional sense, is that its employees made statements that may have been intended to discourage African-American consumers from seeking a loan from Townstone. It is unclear whether these statements were intended to be commercial speech or merely ad hoc commentary regarding local current events.
Finally, it is worth noting that ECOA prohibits a creditor from discriminating against any “applicant,” which Regulation B clarifies to include prospective applicants. While the complaint alleges that Townstone discriminated against both prospective applicants and applicants, the CFPB makes no claim that Townstone’s actions had any effect on consumers who already had applied for a loan.
Ultimately, the complaint appears to signal the CFPB’s return to more aggressive and creative redlining enforcement under ECOA, and the mortgage industry may need to consider a more comprehensive approach to compliance to avoid regulatory risk.