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CFPB’s Action Against Townstone Financial Sets a New Standard for Fair Lending

November 2, 2024

In a case with broad implications for mortgage brokers, the Consumer Financial Protection Bureau (“CFPB“) recently reached a settlement with Townstone Financial over alleged redlining practices. This action comes on the heels of a pivotal ruling from the Seventh Circuit Court of Appeals, which upheld the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA“), confirming that ECOA and fair lending protections extend beyond formal applicants to include potential applicants who may be discouraged from applying.

1.Case Background and Legal Developments

In 2020, the CFPB filed a lawsuit against Townstone Financial, alleging that its advertising, marketing, and business practices discouraged African Americans from applying for mortgage loans. Townstone argued that the ECOA only applies to individuals who submit formal applications, but in July 2024, the Seventh Circuit rejected this argument. The court confirmed that ECOA applies to “prospective applicants” who could be discouraged from applying due to discriminatory practices, setting a critical precedent for how the industry must approach fair lending compliance.

The settlement requires Townstone to: (A) Pay a $105,000 penalty to the CFPB’s victims relief fund; and (B) Maintain rigorous compliance with ECOA standards to avoid additional penalties.

This case reinforces that brokers must consider both applicants and potential applicants when evaluating their advertising, outreach, and business practices. Lenders should avoid any actions that could be perceived as discriminatory or discouraging to specific communities.

2.Key Compliance Takeaways for Brokers

The CFPB’s victory in this case underlines the expansive reach of ECOA and the importance of fair lending practices for brokers. With ECOA protections now clarified to extend even to prospective applicants, brokers should consider these key steps for compliance:

Review Marketing and Outreach: Ensure that marketing materials, social media content, and other outreach efforts are inclusive and avoid language or imagery that could be perceived as discouraging certain demographics.
Audit Business Practices: Regularly evaluate processes, from lead generation to customer service, to confirm that all applicants and prospective applicants are treated equitably.
Train Staff on Fair Lending Standards: Conduct regular training on ECOA and fair lending requirements to keep all employees aligned with current standards and best practices.

3.Compliance Is Key

The CFPB’s action against Townstone Financial is a powerful reminder to brokers of the need for diligence in fair lending compliance. By recognizing that ECOA applies to all individuals, including those who have not yet applied, the case highlights the CFPB’s commitment to preventing redlining and ensuring access to credit for all communities. Brokers should consider this a crucial opportunity to reinforce their commitment to fair lending and adjust policies where necessary to align with ECOA and CFPB expectations.