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A Chicago-based mortgage broker accused by federal regulators of making disparaging comments on a weekly radio talk show that discouraged African Americans from applying for home loans from his company is off the hook, for now, after a federal judge ruled that the company’s conduct could not have violated the Equal Credit Opportunity Act.

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” African-American applicants from seeking mortgage loans from Townstone Financial.

In dismissing the case on Feb. 3, U.S. District Judge Franklin Valderrama agreed with attorneys for Townstone Financial that the Equal Credit Opportunity Act (ECOA) only prohibits discrimination against actual applicants, rather than “prospective applicants.”

“To be clear, the court appreciates the expertise of the CFPB in implementing the ECOA and commends its attempts to prevent the deplorable practice of discouraging people, on the basis of race, from applying for credit,” Judge Valderrama wrote in his opinion and order. “The practice of limiting credit to individuals based on criteria other than creditworthiness is as odious as it is offensive.”

However, Valderrama wrote, the “plain language” of the Equal Credit Opportunity Act “unambiguously prohibits discrimination of ‘applicants,’ and not ‘prospective applicants,’ ” and that he was “duty-bound to follow precedent” from a previous case and not defer to the CFPB’s interpretation of the statute.

One of the attorneys who defended Townstone Financial, Sean Burke of Mattingly Burke Cohen & Biederman, called the dismissal of the case “a great day for small businesses in America.”

“For five years, the bureau pursued a small mortgage company using a strained interpretation of ECOA. This was a classic example of governmental overreach,” Burke said in a statement. “We are grateful that our clients, Townstone and Barry Sturner, stood up to the bureau and the court for its thorough analysis and appropriately limiting the bureau’s jurisdiction.”

In a Facebook post, Townstone Financial celebrated the decision, saying the company had been vindicated by Valderrama’s dismissal of the CFPB’s “baseless lawsuit.”

In a blog post analyzing the decision, attorneys with the Troutman Pepper law firm, which was not involved in the lawsuit, said that the scope of the Equal Credit Opportunity Act “has been attacked from both directions in recent litigation.”

But the decision won’t affect mortgage redlining cases brought by the U.S. Department of Justice, which also rely on the Fair Housing Act, wrote Troutman Pepper attorneys Mark Furletti, Lori Sommerfield and Chris Willis.

While the CFPB is likely to appeal the decision, it may be forced to refer redlining cases to the Department of Justice in the future, since it lacks the authority to bring claims under the Fair Housing Act, the Troutman Pepper attorneys wrote. The CFPB declined Inman’s request for comment.

The Justice Department announced an initiative to combat redlining in October 2021, and has announced five settlements with lenders since then.

Last month, in what was touted as the biggest redlining settlement ever reached by the Department of Justice, City National Bank agreed to invest at least $31 million in majority-Black and Hispanic neighborhoods in Los Angeles County to settle allegations that it avoided making home loans there.

In its lawsuit against Townstone Financial in the U.S. District Court for the Northern District of Illinois, the CFPB cited examples in which “real estate experts” on the company’s call-in radio show allegedly disparaged callers from African American areas and the communities they lived in.

On one show that aired in 2014, for example, a caller from Markham, Illinois — where 80 percent of residents are African American — asked how he and his wife could improve their credit scores.

After advising the caller to “keep those women in line over there in Markham” and “stop spending freaking money [on your wife] and tell her to get a better job,” the unidentified Townstone host said “it’s crazy in Markham on weekends” and that “You drive very fast through Markham … you don’t look at anybody or lock on anybody’s eyes.”

On another show the same month, hosts including a local Realtor and a bankruptcy attorney recommended that listeners who were preparing their homes for sale should take down their Confederate flags before putting them on the market.

In a 2016 episode, Sturner said the South Side of Chicago is “hoodlum weekend” between Friday and Monday, and that the police are “the only ones between that [area] turning into a real war zone and keeping it where it’s kind of at.”

The CFPB alleged that while Blacks represent 30 percent of Chicago’s population, Townstone did not target any of its marketing to African Americans.

From 2014 to 2017, the lawsuit alleged, only 1.4 percent of the 2,700 mortgage applications submitted to Townstone were submitted by African Americans, and that Townstone received a much lower percentage of applications than its competitors from residents of predominantly African American neighborhoods.

Get Inman’s Extra Credit 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.

Email Matt Carter

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