Recently, the Consumer Financial Protection Bureau (“CFPB”) filed its first redlining action against a non-depository institution. While the CFPB has yet to issue guidance on how it would assess the activities of a non-bank lender for potential redlining, the CFPB’s allegations in this case give mortgage lenders a glimpse of what is expected. compliance matters.
On July 15, 2020, the CFPB filed a complaint in U.S. District Court for the Northern District of Illinois against Townstone Financial, Inc. (“Townstone”), alleging that the mortgage lender had 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 contain any claims under the Fair Housing Act (“FHA”), as this Fair Loan Act is enforced by the United States Department of Housing and Urban Development (“HUD”) and the US Department of Justice (“DOJ”). . Typically, the term “redlining” refers to a specific form of discrimination whereby the lender offers unequal access to credit or unequal credit terms due to the prohibited basic characteristics of residents of the area in which the applicant resides. loan or in which the residential property to be mortgaged is located.
According to the complaint, during the period from January 1, 2014 to December 31, 2017, Townstone “engaged in unlawful redlining and acts or practices directed against potential candidates which would deter potential candidates, on the basis of race, to apply for credit in the Chicago MSA. In support of this claim, the CFPB says Townstone’s weekly radio shows and marketing podcasts included statements about African Americans and predominantly African American neighborhoods (using terms such as “frightening” And “jungle”) that would discourage potential African-American applicants from applying for Townstone mortgages.
Lack of direct marketing
Other than the allegations regarding Townstone’s radio shows and podcasts, the complaint does not cite any intentional conduct or effort by Townstone to discriminate against African Americans or African American neighborhoods. Rather, the complaint leads to a general conclusion that Townstone “made no effort to sell directly to African Americans.” In support of this statement, the CFPB notes that Townstone did not specifically target marketing to African Americans and did not employ an African American loan officer among its 17 loan officers in the MSA of Chicago. As a result, Townstone received few applications from African Americans and only a handful of applications from residents of predominantly African American neighborhoods.
However, regarding the allegation that Townstone did not specifically target marketing to African Americans, the CFPB admits that Townstone generated 90% of its apps from radio advertising on an AM radio station. which “reached the entire Chicago MSA” and therefore included residents of predominantly African-American neighborhoods. Further, with respect to the allegation that Townstone did not employ an African American loan officer, it is unclear how the CFPB expects the race of a particular loan officer to have increased the number of inquiries from members of the same racial group, as Townstone’s business model relied on leads received through radio advertising rather than referrals.
HUD and the DOJ have introduced cases of early redlining under a disparate treatment of discrimination theory, which requires proof of a lender’s motive or discriminatory intent. More recently, federal regulatory agencies have based redlining claims on statistical evidence that demonstrates a lender’s inability to market and infiltrate geographies that have a strong minority presence.
In support of its claim against Townstone, the CFPB cites data comparing loan applications received by Townstone with those of its peer mortgage lenders. While only 1.4% of loan applications Townstone received were from African Americans, the average among peer lenders was 9.8%. Likewise, only between 1.4% and 2.3% of Townstone’s loan applications came from predominantly African-American neighborhoods, while the average among peer lenders was between 7.6% and 8.2%. In support of its claim, the CFPB maintains that African Americans make up about 30% of Chicago’s population, but fails to rate Chicago’s African-American population of around 16% MSA.
In light of this data, the complaint asserts that Townstone acted to meet the credit needs of the predominantly white MSA neighborhoods of Chicago while avoiding the credit needs of the predominantly African American neighborhoods. Therefore, CFPB alleges that Townstone thereby discouraged potential applicants from applying to Townstone for mortgages in these neighborhoods.
In response to the allegations, Townstone issued a fact sheet defend against CFPB’s claim and note its efforts to “reach as wide a geographic area as possible” taking into account legitimate and non-discriminatory factors such as signal strength, and with reference to other marketing measures specifically aimed at the African American community. Additionally, Townstone hired a third-party expert to help demonstrate how Townstone is not an outlier among its peers.
To take away
The complaint illustrates the CFPB’s position that non-bank lenders can be held liable for redlining even if 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 the number of loan applications received – will be benchmarked against other lenders of similar size and loan origination volume. As such, lenders seeking to mitigate fair loan risk should assess the geographic distribution of their lending activity to determine whether, over a given time period, they were much less likely to receive loan applications from minority areas than non-minority areas.
CFPB pursues Redlining claim
More importantly, the complaint demonstrates the CFPB’s willingness to pursue a redlining claim in the absence of the traditional claim that the lender was seeking to draw a “red line” around a demographic or area. geographic in particular. Townstone’s radio advertising was not limited to any particular demographic or geographic area, nor could Townstone have altered the radio signals in any way to include or exclude groups. or particular geographic areas. Further, Townstone had no control over the audience demographics of the AM radio station or that of any particular radio program.
Rather than making a traditional claim of redlining (i.e. actively avoiding a particular demographic or geographic area), the CFPB seeks to hold Townstone accountable for not conducting affirmative outreach and marketing to African Americans. For example, the CFPB points out that Townstone did not have African-American loan officers. Yet the fact that a lender does not carry out positive outreach to certain demographic groups or geographies, including by hiring loan officers from a particular demographic group, does not constitute redlining – and such actions are not. not required by ECOA either.
The only allegation Townstone has pointed out, in the traditional sense, is that its employees made statements that could have been intended to discourage African-American consumers from applying for a loan from Townstone. It is unclear whether these statements were intended to be commercial speeches or just ad hoc commentaries on local news.
Finally, it should be noted that the ECOA prohibits a creditor from discriminating against any “claimant”, which Regulation B specifies to include potential claimants. Although the complaint alleges that Townstone discriminated against both potential applicants and applicants, the CFPB does not claim that Townstone’s actions had any effect on consumers who had previously applied for a loan.
Ultimately, the complaint appears to signal the CFPB’s return to a more aggressive and creative application of redlining under CEAA, and the mortgage industry may need to consider a more comprehensive approach to compliance to avoid the risks. regulatory.