Today, in another legal blow to the CFPB, a federal court in Illinois dismissed the Bureau’s redlining lawsuit against Townstone Financial (“Townstone”) and its owner.

The Bureau made waves back in 2020 when it filed the lawsuit, which was the first public redlining action brought by the Bureau against a non-bank mortgage lender. While the case has been working its way through the judicial process, the CFPB, DOJ, OCC, and state attorneys general have racked up a number of large dollar redlining settlements with both bank and non-bank mortgage lenders using the same theory of liability.

In the lawsuit, the Bureau alleged that Townstone “redlined” majority-Black areas in Chicago and illegally “discouraged” prospective applicants in violation of ECOA. In its motion to dismiss, Townstone argued that, although ECOA prohibits discrimination against applicants, its scope does not extend to prospective applicants. In granting Townstone’s motion to dismiss, the court applied the Chevron standard and held that “[t]he plain text of the ECOA thus clearly and unambiguously prohibits discrimination against applicants, which the ECOA clearly and unambiguously defines as a person who applies to a creditor for credit. . . . The Court therefore finds that Congress has directly and unambiguously spoken on the issue at hand and only prohibits discrimination against applicants.” The court went on to state that, because ECOA is unambiguous, it affords no deference to the language in Regulation B that would purport to prohibit discrimination against prospective applicants.

The court’s decision has wide-reaching ramifications for future fair lending examinations, enforcement actions and lawsuits, including the DOJ’s recently announced “Combatting Redlining Initiative.”

Stay tuned for a more detailed analysis of the decision and its ramifications for the mortgage industry.