CFPB Takes Action to Address Townstone Financial’s Unlawful Redlining
November 3, 2024 / Source: CFPB
WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) filed a proposed order to resolve its case against Townstone Financial for discriminatory lending practices and redlining African American neighborhoods in Chicago. If entered by the court, the proposed order would prohibit Townstone from taking any actions that violate the Equal Credit Opportunity Act (ECOA) and require the company to pay a $105,000 penalty to the CFPB’s victims relief fund. Today’s action follows lengthy contested litigation and a unanimous July 2024 decision from the United States Court of Appeals for the Seventh Circuit that stated that the ECOA prohibits lenders from discouraging prospective applicants on a prohibited basis from applying for loans.
“The CFPB’s lawsuit against Townstone Financial included a major appellate court victory that makes clear that people are protected from illegal redlining even before they submit their application,” said CFPB Director Rohit Chopra. “The CFPB will continue to prosecute those who engage in modern-day redlining.”
The Seventh Circuit’s decision held unanimously that “an analysis of the text of the ECOA as a whole makes clear that the text prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit,” which is consistent with the Bureau’s regulation interpreting ECOA. The Court of Appeals reversed the decision of the district court, which had initially dismissed the lawsuit, and remanded the case for further proceedings.
Townstone was a nonbank retail-mortgage creditor and broker based in Chicago through 2018. Ninety percent of Townstone’s mortgage lending was in the Chicago metropolitan area. From 2014 through 2017, Townstone ranked in the top 10 percent of lenders that drew applications from the Chicago metropolitan area, receiving an average of 740 mortgage loan applications each year. Townstone ceased mortgage lending in 2018 during the CFPB’s investigation, and is now exclusively a mortgage broker.
In 2020, the CFPB sued Townstone for discouraging potential applicants because of their race or the racial composition of where they lived or sought to live. Specifically, Townstone’s advertising, marketing, and business practices discouraged African Americans from applying for credit and actively avoided the credit needs of African American applicants and African American neighborhoods in the Chicago metropolitan area.
Townstone drew only five or six applications a year for properties in neighborhoods that were more than 80 percent African American, despite those neighborhoods representing nearly 14 percent of census tracts in the Chicago metropolitan area, and more than half of the applications Townstone did draw from those neighborhoods were from white applicants. From 2014 through 2017, barely 2 percent of Townstone’s mortgage-loan applications were for properties in majority African American neighborhoods, even though they make up nearly 19 percent of the Chicago metropolitan area’s census tracts.
Enforcement Action
Under the Consumer Financial Protection Act, the CFPB has the authority to take action against institutions violating consumer-financial protection laws, including the Equal Credit Opportunity Act and the Consumer Financial Protection Act. If entered by the court, the proposed order would require Townstone to pay a $105,000 penalty, which will be deposited into the CFPB’s victims relief fund. If Townstone violates the Equal Credit Opportunity Act again, it could find itself in contempt of the court order and face further sanctions.