The Townstone Financial Case is the second suit against the CFPB (Consumer Financial Protection Bureau), which has been aggressively pursuing redlining claims against independent mortgage bankers over the past couple of years. This time, it lost, and this landmark case gives us key takeaways on just how much power should be in the hands of the CFPB and how do we know it is already overstepping its bounds. Joining the show to explain the case is Mitch Kider of the WBK Firm. Mitch believes that the Townstone Financial Case is an important one from an administrative law perspective because it clearly defined the bounds of the CFPB’s authority. Although this would hardly undo the damage that the CFPB has already done to countless companies, this is a positive step towards fairer regulation in the industry. Learn more from this episode.
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The Townstone Financial Case: CFPB, ECOA, And Fair Lending With Mitch Kider Of WBK Firm
I’m excited to have a dear friend back on the show, Mitch Kider. He’s well-known to all of you out there. There’s something significant that has developed that Mitch reached out to us. He says, “We need to share this with your audience.” We’re honored to have Mitch give us some more insights.
Mitch Kider, it is good to have you back.
It’s great to be back here. It’s good to be here with you. Thank you.
We don’t need to introduce you. You’re so well-known in the industry. My favorite part is you’re the only one to have sued CFPB. There have been some new developments, and that’s what we’re here to talk about. Get us updated on the latest developments legally, especially as it relates to CFPB, fair lending, and ECOA. What’s the latest?
I wanted to come on and talk to you about a case that many in the industry are talking about. That’s the Townstone Financial case. This is another case, a second case, in a suit against the CFPB that the CFPB has lost. The CFPB doesn’t necessarily learn. They like to test the limits of their authority. This was a case in which they tested the limits of their authority as well, and the court rebuked them for it. It’s a fair lending case. It deals with redlining, the CFPB’S theory under the ECOA, the Equal Credit Opportunity Act, and how they can reach lenders and allege that they redlined because of statements they made, marketed, or things along those particular lines.
Let me give you a little background. It’s a case that was brought by the CFPB in a Federal court in Chicago back in 2000. It was against a small mortgage company in Chicago known as Townstone Financial. The Pacific Legal Foundation, which is a nonprofit conservative firm that brings suits against the government when they think it’s necessary, was brought in by some private attorneys. They did an excellent job with this particular case.
In this case, the CFPB alleged that Townstone Financial violated ECOA based on comments that were made by the company on a local AM radio program and were used for marketing purposes. The CFPB alleged that the comments themselves were racially discriminatory and that the comments had the effect of discouraging minority applicants from applying for a mortgage loan with Townstone.
That may sound familiar to many in your audience because the CFPB has been pursuing redlining claims, especially against independent mortgage bankers. They’re suggesting that their marketing or lack of marketing is discouraging minority applicants from applying for loans. They match it up to statistically how those lenders are doing in minority census tracks, and they allege redlining.
In this particular case, they alleged that Townstone, as a result of the comments that were made on this radio program was, in fact, discouraging minorities from making loan applications with them. It’s important because ECOA itself is an important statute. ECOA bans discrimination against applicants in all loan contexts against an applicant applying for a loan. That may be a mortgage loan and other loans as well. It’s not simply limited to mortgages.
The regulation that was issued under ECOA a long time ago by the Federal Reserve Board expanded that particular statute. The regulation of the statute said that it doesn’t just ban discrimination against an applicant. It bans discrimination against a potential applicant or applicants by making statements that may discourage them from applying for credit itself. This lawsuit or the enforcement action that was brought by the CFPB against Townstone was under that particular regulation. They said Townstone because the company made these allegedly discriminatory comments on their radio program. I’m not here to tell you that these were good comments.
I read them in the memorandum of opinion and order that you sent over for me to read about this. There were some comments that I understand could be interpreted as inflammatory and things like that. I advise mortgage companies, banks, and anyone in the mortgage industry. You defend them and give them advice as well. We know these things are said.
We are not saying that you should be careful about what is said. There’s some encouragement in this if you have someone out there within your company saying things that you may not, as a business owner, stand behind. It doesn’t have to be fatal or terminal. That’s where you’re going in this. Is that correct?
I’m not here to condone the statements that were made. Where I’m going is the rule of law is such that a law does not apply to a situation where the government cannot use that particular law, but otherwise thinks the conduct is bad. It’s not because the government thinks the conduct is bad that it necessarily means that the conduct violated the equal credit opportunity. That’s the point. That’s an important concept. That is the rule of law. You can’t judge people and say, “Your conduct in my opinion was bad. Therefore, I’m going to throw an enforcement action against you and allege that you violated a law,” when that law does not say that.
In this particular case, the CFPB did that because a regulation says you can’t discourage prospective applicants. They brought the case under the regulation itself, but Townstone Financial filed a motion to dismiss. What they pointed out in this motion to dismiss was that the first thing that you have to look at is the statute. You have to look at what Congress said. Congress makes the law. Regulators don’t make the law. Regulators implement the law, but Congress makes the law because they are elected officials.
What the motion to dismiss pointed out to the court was that the law says you cannot discriminate against an applicant in a credit transaction. It doesn’t say anything about potential applicants. It especially doesn’t say anything about potential applicants that are completely unknown to you and that may be listening to a radio program that the general public is susceptible to.
Does it mean that a potential applicant is the general public? Absolutely not. What the motion to dismiss said was, “The regulation went too far. They, in fact, are saying something that the statute doesn’t say. It’s not within the authority of the statute itself.” The CFPB, for the first time, took that one step further and sought enforcement action. They said, “You said bad things. You said terrible things. I believe that it’s an ECOA violation.”
In fact, they did say some things that many of us would say are unacceptable. What you’re saying is it was not a violation. What the courts came back and ruled on is it’s not necessarily a violation of ECOA.
That’s exactly right. It’s an important case from an administrative law perspective. That’s why I thought we ought to talk about this case.
It’s good. Marc Helm has joined in on the interview. Marc, it’s good to have you joining in here. You got Mitch on here. Let’s go on and start talking about what are the things that we, as lenders that are helping in the lending business, can walk away from this. What are some of the lessons that need to be learned?
Before we get to the lessons specific to lenders, let me say this. It’s an important case from an administrative law perspective.The Townstone Financial case is an important one from an administrative law perspective. It shows what an agency like CFPB can and can’t do. Click To Tweet
Explain what administrative law is. Some people may not understand when you say administrative law. If you could expand on that.
When we talk about administrative law, we talk about the issue of what an agency such as the CFPB or other agencies can and can’t do. What they can do sometimes is interpret laws. They can implement those laws that Congress charged them with implementing. They can be responsible for it and enforce those particular laws, but they can’t make laws. They can’t make the law themselves. Congress makes the law.
The reason I say it’s important from an administrative law perspective is a long time ago, there was a case in the Supreme Court. It was known as Chevron. In the Chevron case, the Supreme Court was looking at a statute. They were asked, “When does an agency go too far? Can an agency interpret a statute and issue a regulation based on its interpretation? How does one judge?” Congress and the Supreme Court came out with a two-part test. When regulation is issued, the court first needs to look to the statutory authority. What law did Congress make?
Under the Chevron analysis, the first step that the court had to take was to look at ECOA and say, “The allegation here is that the conduct and the words that were spoken discouraged prospective borrowers in violation of ECOA. Are our prospective borrowers covered by ECOA?” They looked at the statute itself. Perspective applicants are the words. They looked at the statute itself and said, “ECOA bans the discrimination against an applicant in a credit transaction.” That’s known for an applicant in a credit transaction. It doesn’t ban anything against prospective unknown applicants itself.
What they ultimately decided on a one-step analysis was that when the regulation was issued years ago, it exceeded the statutory authority. When the CFPB set out with an enforcement action against Townstone Financial, they were exceeding their statutory authority as well. It’s important because how many times have we seen the CFPB overreach? How many times have we seen regulation through enforcement? How many times do we need to see regulations that go far beyond anything that Congress charged them with?
The second part of the Chevron analysis is sometimes a little ambiguous. You can’t tell whether or not Congress meant to include something or not. When the statute is ambiguous under the Chevron analysis given to us by the Supreme Court, then an agency can use its expertise to interpret it and implement it in the way they deem Congress may have wanted that to be done. If the statute itself is clear on its face and its plain language, a regulatory agency cannot go any further than that in issuing a regulation, an enforcement action, or anything else along those particular lines. That’s an important decision.
The big question that I have is, is this going to stop CFPB from their overreach? What’s your read on it with the climate there in DC better than anybody?
It’s a sad thing to say. First of all, the case was decided on a motion to dismiss in a Federal district court in Chicago. It’s not binding at this very moment in time on any other courts. It’s not binding in any other states.
It is a case precedence, though. Isn’t there a certain amount of case precedence on this?
Ultimately, it may prove to provide some precedence within the Seventh Circuit, which is where this case is. It will probably go up on appeal at the Seventh Circuit and provide precedent if the Seventh Circuit, in fact, rules on it regardless of which way they rule. If they uphold what the lower court did, then sure. That’s right, but only within that jurisdiction and only within the Seventh Circuit Court of Appeals. Other courts may decide this thing very differently.
Do I think this is going to stop the CFPB? No. I don’t think this is going to stop the CFPB. I always thought from the very beginning that the CFPB, their intent was to make the law even though that’s not what their authority is to do. In some ways, this is very similar to the PHH case. In that particular case, the CFPB went ahead and interpreted RESPA in a way that was never interpreted like that for 40 years and running and in a way that was contrary to the statute.
The ruling is very much the same. That ruling is, “Congress makes the law, and we’re looking at that particular law. We’re looking at the plain language of that law. You have exceeded your authority by either changing that or interpreting that in a way that’s not in accordance with the plain language of it.” It’s the same type of precedent. Yet, the PHH decision is years old already. It’s been a number of years since we got that particular decision. We see this with ECOA with the CFPB. Do I think that the CFPB knew that this was a risk? Absolutely. Do I think that they cared? No, I don’t. Do I think we’re still going to see more things like this in the future? Yes.
It does create some encouragement for those of us that are seeing. You led the first case where you defeated CFPB. We have a second one, and we start building on this. At some point in time, it’s going to set up, I would assume, something where you’re going to see enough smackdown through this type of action. Although it’s not a precedent, it’s got to start having some impact.
Courts like company. The more decisions we get along these particular lines and the more we see courts striking down regulations and enforcement actions as exceeding their statutory language where that’s the authority, the more other courts are going to be willing to do that as more cases are brought up.
That’s encouraging. Marc, are there any questions you have? Do you want to jump in at this point?
I have two questions for Mitch. I’ll get them both on the table if you could help with them. The first is there’s been a lot of scuttlebutt about whether CFPB can even exist. I’d like to talk about that in a minute in the scheme of looking at this. The other thing I wanted to chat about was that one of the major problems with CFPB is they have no official oversight of that organization from anyone.
Both of those questions are good questions. Let me answer the second question first. Is there oversight of the CFPB? The answer is there is some oversight of the CFPB because you may recall this structure was found to be unlawful. We had a CFPB Director that would be appointed for a five-year term, and they could only be removed by the President for a cause. It is a very difficult removal provision. The courts have changed that. The Supreme Court changed that.
The CFPB Director can be removed by the President at will. They serve at the President’s discretion. There’s some presidential and executive-level oversight. They are required to report to Congress at least twice a year, I believe it is, on what they otherwise do, but it stops there. They don’t have the same oversight that most other executive branch agencies have.
What they’re missing goes to your first question, Marc, and that is where do they get their funding? They can request up to 12% and get up to 12% of the Federal Reserve Board’s budget on an annual basis. It’s not coming from Congress. It’s coming from the Federal Reserve Board. That’s a separation of powers issue in and of itself right there. That’s because when our Founding Fathers set up our government, they set up three branches. That’s the executive branch, the legislative branch, and the judicial branch. Each has a check and balance against the others.
The congressional branch has the power of the purse. They make the appropriations. They gave it away when they put the CFPB together. The CFPB merely gets 12% or can request up to 12% of the Federal Reserve Board’s budget, and the Federal Reserve Board has to give that to them. That’s the challenge that you see that goes to the question of whether or not the CFPB can continue to exist as it stands.
The challenge that you have comes out of the Fifth Circuit Court of Appeals where the court rules that the funding mechanism for the CFPB is unconstitutional. Funding has to come from Congress, and Congress cannot simply give that away. If it’s unconstitutional, then the entire structure of the CFPB from day one would, in fact, be unconstitutional. I believe it’s going to be heard by the Supreme Court, and they’re going to make that particular determination. It’s a tough determination to make. It’s not necessarily so tough on the law itself, but a tough determination to be made.
The CFPB came into existence in 2010. It’s been operational since 2011. It has issued many regulations. It’s gone through many enforcement actions. It has issued many civil money penalties. If, in fact, the court ultimately agrees with the Fifth Circuit and says that the funding mechanism was illegal, then it did that unconstitutionally.
It did that using money according to the Fifth Circuit Court of Appeals that it was unconstitutional for them to have. Imagine trying to unwind from what’s occurred over the last couple of years. If the Supreme Court agrees to take this case on, they have a tough path in front of them. That’s answering question number two, fashioning the right remedy for that question.
We had you years ago when the CFPB was all getting started. The value of having a show for as long as we’ve had and having guests on for as long as we have. You went over and talked about how many regulatory bodies were rolled up inside of CFPB. I recall different regulatory bodies that were rolled up, packaged, and combined. I can’t remember what the number was, but it was insignificant. You said, “Undoing this is going to be almost impossible to unravel this ball of tape.”
The CFPB was given the authority over nineteen Federal Consumer Financial Protection statutes. That came from a number of different agencies. Nineteen laws and jurisdictions that came from many different agencies themselves. The CFPB has issued regulations under those laws. They’ve had enforcement actions. They’ve issued civil money penalties. They’ve put companies out of business. They’ve done so much with that over the course of the last couple of years. It’s almost impossible to unwind from what’s been done in the past.The CFPB has used its authority to put so many companies out of business over the last couple of years. It's almost impossible to undo what's been done in the past. Click To Tweet
Finding a remedy is going to be the biggest challenge even if it is, in fact, ruled to be unconstitutional. That’s a good point. Marc, is there anything else that you have on that? I want to get back to Townstone Financial and some of the lessons we should be learning from that.
I have one more question. Where did the civil money penalties that were charged by CFPB over the years go? Were they able to use those funds for their continuous operation, or did they have to deposit those back to where their source of funds for operating came from?
The funds that the CFPB has brought into themselves were from the Bureau of the Federal Reserve Board. That’s where that money’s going. That’s what’s happening with the CFPB.
Let’s get back to the Townstone Financial case. This is significant for what you’ve already explained, but what do we take away with this as the better way?
The good takeaway is what I said. We have a court rebuking that the CFPB’s actions exceed their authority. They can’t do that because the regulation exceeded the authority and the plain language of the statute itself. That’s a good takeaway. The second takeaway, which is the reason why I wanted to talk about this particular case here knowing how many lenders are going to be on, is the takeaway from a fair lending perspective. My answer to that is there’s nothing you should take away from a fair lending perspective other than maybe the CFPB should not be pursuing redlining.
Is it good to get on a radio program and use the language that allegedly was used? No. It’s not a good thing to do. That’s number one. Number two, the problem the CFPB has and had in this particular case is they brought this claim under ECOA. There are two principal statutes that go to discrimination in financing and housing. One is the Fair Housing Act. That’s a broad statute. You cannot, under the Fair Housing Act, discriminate in any aspect of the housing transaction. That includes marketing, buying, selling, financing, and anything else. Could this potentially be a violation of the Fair Housing Act? Potentially, it could have been brought.
When the CFPB was created by Congress, they took the Fair Housing Act and left it where it was. The agency that has jurisdiction under the Fair Housing Act is the Department of Housing and Urban Development. The CFPB was given jurisdiction under ECOA. That wasn’t enough for the CFPB, so the CFPB came up with this theory under ECOA that said, “I’m going to go after lenders for redlining because, under ECOA, I believe they’re discriminating against and discouraging potential applicants.” That’s why.
It’s been brought by the Department of Justice with HUD. Maybe you have different results. The lesson for lenders is not, “I can do what I want to do.” It’s not, “I don’t have to worry about my marketing practices.” It’s not, “I can avoid marketing in minority areas and minority census tracks.” Don’t walk away with that particular lesson. That is not the lesson of the Townstone Financial case. The lesson of the Townstone financial case is that the CFPB left with only 1 of 2 two principal statutes that go to discrimination. They tried to make the one that they were left with work with facts that don’t fit into that particular statute. That’s the only lesson that you can walk away from.
You’re excellent at clarifying that.
That’s very enlightening, and it will be for all those folks.
Mitch, I want to say thank you so much for reaching out. You’ve been in the industry for how many years now in 2023?
I’m 50 years into it, so I’ve got you by 8. What you have done in our industry is legendary as well as the information that your firm publishes. You have a newsletter. Talk about some of the resources that lenders have available through your law firm. You reached out to me and other shows you were on. You’re high profile and speak at all these conferences. What are some of the other resources that people can grab from your law firm?
We are full service to this particular industry. You can go to our website, TheWBKFirm.com. You will find our newsletter there. You can subscribe to that particular newsletter. You’ll find podcasts. You will find speeches that we do and webinars that we otherwise provide. You’ll find treatises on laws that impact you as lenders. You’ll find our newest edition, which I’m very proud of. It’s called the WBK Download, which are short, little fifteen-minute downloads on recent developments.
When did you start that?
We started that in January 2023.
I’m going to be signed up for those as well. Your website has got valuable resources. I’m a faithful reader of everything that you’ve been publishing, but I somehow missed that. I’m excited. The audio is another way that lenders consume more quickly when they’re out being busy, driving, or doing different things. It’s a great way to consume additional information. Thank you so much for your service to our industry, the full services you bring, and all that you have. Thank you for coming on and sharing this with us. Thank you so much.
Thank you for your services to this industry, and thank you for inviting me as a guest here.
You bet. It’s been a pleasure. Marc, thanks for joining in. It’s always good to have great content. This is some of the best content we’ve had in a while. I love hearing what’s going on and getting the proper perspective.
It is very enlightening. People are going to be amazed when they read some of the things that were said in this. It’ll give them a different perspective than they might work with every day.
It was a good question you asked, Marc, about the refresher, the CFPB and the funding, where we end, and where the constitution is. 2023 could be an interesting year. Mitch, is this going to be the issue? Is it going to be decided whether or not the Supreme Court’s going to hear the CFPB? It was the Fifth Circuit Court. What were they going to be looking at?
There was a writ of certiorari filed by the CFPB asking the Supreme Court to hear the case. Do I think the Supreme Court is going to hear this case? It’s important enough, but we’ll see.
If that happens, is it going to happen in 2023, in your opinion?
The term is up in June for 2023, so yes. There is still time for that to happen.
Thank you for coming on. Have a great day. I appreciate you so much, Mitch.
Thank you more.
It was good to talk to you, Mitch. Thank you.
- Mitch Kider
- Townstone Financial
- Pacific Legal Foundation
- WBK Download
About Mitchel H. Kider
Mitchel H. Kider is the Chairman and Managing Partner of Weiner Brodsky Kider PC, a national law firm specializing in the representation of financial institutions, residential homebuilders, and real estate settlement service providers.
Mitch is a fierce advocate for the mortgage banking industry and he is considered one of the foremost experts in legal and regulatory matters pertaining to this industry. He litigates on behalf of the industry in federal and state courts throughout the country.
Mitch defends clients in investigations and enforcement actions before the Consumer Financial Protection Bureau, Department of Housing and Urban Development, Department of Justice, Department of Veterans Affairs, Federal Trade Commission, Fannie Mae, Freddie Mac, Ginnie Mae, and various state and local regulatory authorities and Attorneys General offices. Mitch is a Fellow of the American College of Consumer Financial Services Lawyers, and a Faculty Fellow of the Mortgage Bankers Association. In addition, Mitch is the author of six books pertaining to residential mortgage finance.