Whether it’s refining your business model, mastering new technologies, or discovering strategies to capitalize on the next market surge, Inman Connect New York will prepare you to take bold steps forward. The Next Chapter is about to begin. Be part of it. Join us and thousands of real estate leaders Jan. 22-24, 2025.
A long-running lawsuit by federal regulators against a mortgage broker whose weekly radio talk show allegedly discouraged Black residents of Chicago from applying for loans could be headed for a settlement — potentially leaving the free speech issues raised by the case unresolved.
The Consumer Financial Protection Bureau (CFPB) sued Townstone Financial Inc. and its owner, Barry Sturner, in 2020, saying statements made by hosts of the company’s AM radio call-in show and podcasts discouraged prospective Black applicants from applying for mortgages.
In a 2016 episode, for example, Sturner allegedly said that between Friday and Monday, it’s “hoodlum weekend” on the South Side of Chicago, and that police are “the only ones between that turning into a real war zone and keeping it where it’s kind of at.”
Attorneys for Sturner scored a win in February 2023, when U.S. District Court Judge Franklin Valderrama agreed with their position that the Equal Credit Opportunity Act (ECOA) only prohibits discrimination against actual loan applicants — not “prospective applicants.”
However, the U.S. Court of Appeals for the Seventh Circuit disagreed with that interpretation, sending the case back to the U.S. District Court for the Northern District of Illinois in July. Discovery in the case was ongoing, with a deadline to wrap up by Jan. 31, 2025.
But attorneys litigating the case notified the court Tuesday that they “have entered settlement negotiations in earnest and believe that settlement is likely. Accordingly, in the interests of judicial economy, the parties respectfully request this court stay all proceedings while settlement negotiations are pending.”
Case draws national attention
The CFPB’s case against Townstone has drawn national attention, in part because of arguments that Sturner’s free speech rights were under attack. But Sturner’s attorneys have also attempted to leverage a recent Supreme Court decision that created a new avenue for challenging the actions of the CFPB and other regulators.
The Pacific Legal Foundation, which bills itself as “a public interest law firm that defends Americans’ liberties when threatened by government overreach and abuse,” came to Sturner’s defense in court.
The Competitive Enterprise Institute — a nonprofit which states on its website that its mission is “to reform America’s unaccountable regulatory state” — came to his defense in the court of public opinion.
In an April 2023 Wall Street Journal op-ed, CEI fellows John Berlau and Stone Washington claimed that “the CFPB is signaling that it may attempt to punish anyone who complains about neighborhood crime.”
The “law-abiding citizen discouraged from applying for a loan by a mortgage professional calling out neighborhood ‘hoodlums’ exists only in a CFPB bureaucrat’s imagination,” Berlau and Stone wrote.
The core issue in the case is whether the CFPB’s interpretation of Regulation B — the language drafted by regulators to implement the Equal Credit Opportunity Act (ECOA) — goes beyond the intent of Congress in passing the legislation in 1974 and in updating through amendments over the years.
The Supreme Court provided ammunition for such challenges in 2021 when it determined the Environmental Protection Agency had exceeded its authority to regulate greenhouse gas emissions without clear direction from Congress. The 6-3 decision in West Virginia v. EPA created a new “major-questions doctrine” that’s provided ammunition for similar challenges.
In an August 2022 brief, CFPB attorneys argued that neither the major-questions doctrine nor First Amendment issues applied in the case.
“This case involves a single, straightforward question of statutory interpretation to which the major-questions doctrine has no application: Whether the Equal Credit Opportunity Act authorized a longstanding provision of Regulation B that prohibits creditors from making ‘any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application,” prosecutors said.
In siding with the CFPB in July, a three-judge appeals court panel rejected Valderrama’s interpretation that ECOA does not apply to prospective applicants.
The appeals court judges found that the lower court erred in focusing on ECOA’s definition of an applicant as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”
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,” the appeals court ruled.
“Congress well understood that ‘any aspect of a credit transaction’ had to include actions taken by a creditor before an applicant ultimately submits his or her credit application,” the Seventh Circuit panel found.
No 1st Amendment ruling
Although attorneys for Townstone and Sturner argued that the CFPB’s interpretation of ECOA violated his First Amendment rights to free speech, neither the trial court nor the appeals court weighed in on that issue.
Attorneys for the defendants submitted briefs on the free speech question that prosecutors rebutted. But in dismissing the case last year, Judge Valderrama felt no need to rule on the First Amendment questions if ECOA did not apply to prospective applicants in the first place.
Sturner’s attorneys had maintained that under the CFPB’s interpretation of ECOA, anyone who made “an errant comment on social media or forwards a post by others that the CFPB believes ‘would discourage’ some unknown ‘prospective applicant’ from applying to someone for credit” could be charged with violating the law.
“The CFPB points to no definition of ‘discouragement’ or ‘prospective applicant,’ meaning that the CFPB can target any creditor on the basis of its own view of what these terms mean,” Sturner’s attorneys argued.
In the context of the CFPB’s allegations against Townstone, they said, “that would mean any creditor who said that a high crime area was a ‘war zone,’ or filled with ‘hoodlums,’ or who criticized the Black Lives Matter movement, or the #MeToo movement, or championed the police over protestors, or opposed immigration, or expressed any number of other views that could be (and have been) characterized as discriminatory in recent years, would be open to the claim that it ‘disparaged’ individuals on a prohibited basis in violation of Regulation B.”
Because the CFPB’s case against Townstone “presents questions of major economic and political significance,” attorneys with the Pacific Legal Foundation urged the court to consider the CFPB’s interpretation of Regulation B in light of the “major-questions doctrine” created by the Supreme Court’s 2021 ruling West Virginia v. EPA.
“Given the importance of free speech in American law, Regulation B and the CFPB’s interpretation of it, alone, constitutes a question of vast political significance,” the foundation’s attorneys argued.
CFPB: Advertising not protected
The CFPB maintained that the speech in question was not protected by the First Amendment because it was advertising.
In its November 2020 amended complaint, the CFPB alleged that Townstone had generated up to 90 percent of its mortgage loan applications from radio advertising — including the “Townstone Financial Show.”
“The Townstone Financial Show is a long-form commercial advertisement, which Townstone refers to as an infomercial, that also includes shorter advertisements for Townstone during commercial breaks,” the complaint said.
“Since 2014, the Townstone Financial Show hosts have discussed mortgage-related issues on the show and have taken questions from prospective applicants. The hosts have regularly referred to their work at Townstone and promoted the benefits that prospective applicants might expect from applying for mortgage loans from Townstone.”
The CFPB alleged that the way neighborhoods and people were characterized on the show “would discourage those who identify or associate with those areas or people from applying for credit.”
“For example, the Townstone Financial Show’s hosts have disparaged majority African American areas as ‘hoodlum weekend’ and approaching ‘a real war zone’ or as ‘crazy’ and places ‘to be driven through quickly’ while avoiding eye contact,” prosecutors alleged.
“They have referred to a place with ‘people from all over the world’ as a ‘jungle’ and ‘scary;’ they have disparaged the women of a predominantly African-American area; and their home-selling advice has included recommendations regarding displays of the Confederate flag.”
In rejecting Valderrama’s interpretation of ECOA, the U.S. Court of Appeals for the Seventh Circuit said attorneys for Townstone Financial could raise the First Amendment issue again if the case went to trial.
But if the settlement that’s currently in the works is finalized and approved, a resolution of the First Amendment issues raised by attorneys for Sturner and Townstone won’t be settled unless there’s a ruling in a similar case.
‘Chilling effect’ on speech
The Competitive Enterprise Institute (CEI) provided Inman with a joint statement from Berlau and Washington on the implications of a settlement.
“Whatever the results of the settlement negotiations, the CFPB’s actions against Barry Sturner and Townstone Financial remain gross violations of the First Amendment and, if not corrected, will have a chilling effect on speech,” the CEI’s statement said.
“The CFPB’s suit against Sturner and Townstone was a blatant attempt to apply anti-discrimination laws to speech made to a general audience in a mass-media venue, rather than to individual customers or employees in a workplace.”
Berlau and Washington noted that the CFPB’s complaint “did not cite any instance in which Townstone denied a mortgage or other financial service to an individual minority applicant. And in none of the statements from Sturner’s radio show that the CFPB labeled as discriminatory did Sturner actually mention minority residents or refer to any minority specifically.”
Because Sturner “criticized the danger in the areas broadly,” listeners “wouldn’t assume he is targeting minority homebuyers,” the CEI fellows said. Instead, they “would likely see he was voicing general concerns about Chicago crime that many residents have shared, including Chicago’s [B]lack [M]ayor Brandon Johnson.”
Redlining cases backed by data
The Biden administration has made redlining a priority, with the Department of Justice reaching settlements with 15 lenders totaling more than $154 million since launching a Combating Redlining Initiative in 2021.
A key component of such cases is an analysis of loan applications and mortgage originations using data that lenders are required to submit under the Home Mortgage Disclosure Act (HMDA).
In announcing a $10 million settlement with Fairway Independent Mortgage Corp. this month, for example, prosecutors said only 3.3 percent of the 7,913 mortgages Fairway originated in the metro Birmingham, Alabama market from 2018 through 2022 were for properties in majority-Black areas. During that period, Fairway’s peers made 10 percent of their loans in those areas, or more than three times the rate of Fairway, prosecutors said.
Madison, Wisconsin-based Fairway — the nation’s third-largest lender — denied that the company engaged in discriminatory behavior and cast itself as a victim of politics.
“Despite a multi-year investigation … the government agencies did not identify any evidence of redlining or other discrimination by Fairway,” the company said of the settlement. “Rather, the government agencies relied on a quota analysis to allege that Fairway was not meeting the needs of residents of majority-Black census tracts, in contravention of the U.S. Supreme Court’s 2023 decisions regarding affirmative action.”
The CFPB cited similar data in its complaint against Townstone. From 2014 to 2017, Black applicants accounted for only 1.4 percent of the 2,700 mortgage requests fielded by the lender in the Chicago market, compared to 9.8 percent of applications taken by its competitors, prosecutors said.
While Blacks represent 30 percent of Chicago’s population, Townstone allegedly neglected to target any of its marketing to African Americans, and none of the 17 loan officers it employed were Black, “even though it was aware that hiring a loan officer from a particular racial or ethnic group could increase the number of applications from members of that racial or ethnic group,” the complaint said.
While the allegations against Townstone may still be litigated in court, Magistrate Heather McShain on Thursday stayed the proceedings for 90 days pending settlement discussions. A joint status report on the case is due on Dec. 6.
Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.
