A year later, CFPB cites Townstone for ECOA violations

It took nearly a year, but the industry-changing lawsuit The Title Report first reported has been filed, as the Consumer Financial Protection Bureau (CFPB) officially sued Townstone Financial for violations of the Equal Credit Opportunity Act (ECOA).

The bureau filed the case in district court in Illinois. Townstone Financial, a three-person mortgage company in Chicago, is being charged with making statements during marketing ventures, including weekly radio shows and podcasts, that illegally discouraged prospective African-American applicants from applying to Townstone for mortgage loans.

The CFPB also said the company’s public statements in those marketing vehicles engaged in “illegal redlining” by discouraging prospective applicants living in African-American neighborhoods in the Chicago metropolitan statistical area from applying to Townstone for mortgages.

Townstone CEO Barry Sturner told The Title Report in August 2019 that his company had received a civil investigative demand (CID) from the CFPB in the summer of 2017. The CID concerned potential violations of ECOA, involving redlining, because of the radio advertising practices of the company and the company’s radio show.

Townstone Financial advertised on a number of different radio stations in the Chicago market, including news talk stations AM-720 and AM-890 and sports talk station AM-670. At issue in the CFPB’s investigation, however, was Townstone’s advertising on news talk station AM-560 and the company’s own podcast, which is similar to the radio show.

In a release announcing the lawsuit, the CFPB said ECOA prohibits lenders from discriminating against applicants in credit transactions on the basis of race, color, national origin, or other prohibited bases, and that the regualtion also prohibit mortgage lenders from making statements, or engaging in acts or practices, that would discourage, on a prohibited basis, applicants or prospective applicants from applying for credit.

“The bureau’s complaint alleges that Townstone violated ECOA and Regulation B by engaging in discriminatory mortgage-lending practices and that these violations also constituted violations of the CFPA,” the release stated. “As alleged in the complaint, from 2014 through 2017, Townstone drew almost no applications for properties in African-American neighborhoods located in the Chicago-Naperville-Elgin Metropolitan Statistical Area (Chicago MSA) and few applications from African-Americans throughout the Chicago MSA.”

In the complaint, the bureau talks about the weekly radio show, aired on AM-560, and the podcast, both of which were available on Facebook Live and advertised on Facebook, Twitter and LinkedIn.

In 2014, the show was hosted by Townstone’s co-owner and president. Beginning in about January 2015, the Townstone Financial Show was co-hosted by Townstone’s CEO and now sole owner, Sturner, along with its vice-president, who was also a loan officer, and another senior loan officer. Townstone generated up to 90 percent of its mortgage-loan applications from radio advertising, including through this show, the complaint stated.

It cited a number of comments made by Sturner on the show, including:

• In a January 2017 episode, the hosts discussed a now-replaced grocery store in downtown Chicago that was part of the Jewel-Osco grocery store chain. Townstone’s CEO described “[having] to go to the Jewel on Division. … We used to call it Jungle Jewel. There were people from all over the world going into that Jewel. It was packed. It was a scary place.” The CFPB stated: “Referring to a neighborhood grocery store with ‘people from all over the world’ as a ‘jungle’ — a word that may be used or understood to be a derogatory reference associated with African-Americans, Black people, and foreigners — and saying that the grocery store was ‘scary’ would discourage African-American prospective applicants from applying for mortgage loans from Townstone.”
• In a June 2016 episode, Townstone’s CEO stated that the South Side of Chicago between Friday and Monday is “hoodlum weekend” and that the police are “the only ones between that turning into a real war zone and keeping it where it’s kind of at.” The CFPB stated: “A mortgage lender and self-described real-estate expert referring to Chicago’s South Side as ‘hoodlum weekend’ would discourage prospective applicants living in the South Side from applying to Townstone for mortgage loans and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in this particular African-American community because the comments indicate that Townstone’s CEO, speaking during an official Townstone marketing program, believes that the area’s defining characteristic is that it is dangerous and full of criminals.”
• In a November 2017 episode, Townstone’s senior loan officer discussed a recent skydiving experience and the ensuing “rush” from the jump; Townstone’s vice-president responded that he thought skydiving was crazy and suggested that “walking through the South Side at 3AM [would] get the same rush.” The CFPB stated: “Referring to a majority-African-American neighborhood — Chicago’s South Side — as a place where simply walking through it would provide a ‘rush’ would discourage, on the basis of race, a prospective applicant living in or applying for a mortgage loan in that area from applying to Townstone because self-described real-estate experts are portraying the area as defined by its danger.”
• In a January 2014 episode, Townstone’s president stated, “it’s a great time to buy, it’s a great time to rent, it’s a great time to sell.” He and that episode’s co-hosts, a local Realtor and a bankruptcy attorney, then gave advice on how to get a home ready for sale, which included “change the light fixtures,” “paint it from top to bottom,” and “take down the Confederate flag.” The CFPB stated: “Joking about a symbol of racial animus or implying that the Townstone Financial Show’s hosts and listeners might display such symbols in their homes would discourage African-American prospective applicants from applying for mortgage loans with Townstone; would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans; and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in African-American neighborhoods.”
• Finally, in another episode from January 2014, a caller from Markham, Ill., asked how he and his wife could improve their credit scores. Markham is a city in Cook County, Illinois, and its population is 80.3 percent Black or African-American, according to the U.S. Census Bureau. Townstone’s president responded that the caller’s wife is “a woman and she probably doesn’t have good credit because she’s a woman,” and that “[you’ve] got to keep those women in line over there in Markham.” After further discussing the couple’s credit concerns, he noted that “it’s crazy in Markham on weekends” and that “I know, I’ve been to Markham.” “You drive very fast through Markham,” he continued, “and you don’t look at anybody or lock on anybody’s eyes in Markham. … You look at your dashboard, you don’t lock on anybody.” Townstone’s president closed the segment by telling the caller to “stop spending freaking money [on his wife] and tell her to get a better job.” The CFPB stated: “Disparaging a majority-African-American city as ‘crazy,’ a place to be driven through quickly, and an area where people should avoid eye contact, would discourage African-American prospective applicants from applying to Townstone for mortgage loans; would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans; and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in African-American neighborhoods.”

In discussing the application of “prospective applicants” as a protected class under ECOA, the CFPB referenced supplemental official interpretations to Part 1002 of the rule.

The interpretation of Paragraph 4(b) states:

“1. Prospective applicants. Generally, the regulation’s protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the act – to promote the availability of credit on a nondiscriminatory basis – § 1002.4(b) covers acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit. Practices prohibited by this section include:

1. A statement that the applicant should not bother to apply, after the applicant states that he is retired.
2. The use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy of exclusion in violation of the act.
3. The use of interview scripts that discourage applications on a prohibited basis.”

The CFPB also alleged that Townstone drew fewer mortgage applications from African-Americans during the time period that other lenders in the Chicago MSA. “From 2014 through 2017, Townstone drew about 2,700 applications, of which only 37 (1.4 percent) came from African-Americans in the Chicago MSA,” the complaint stated. “During the same period, other mortgage lenders in the Chicago MSA drew 1,217,223 applications, of which 119,370 (9.8 percent) came from African-American applicants.”

The complaint said analyses of Townstone’s mortgage-loan applications in the Chicago MSA, as compared to its peer lenders during the relevant period, show disparities between Townstone and its peers in drawing mortgage-loan applications for properties in African-American neighborhoods. These disparities are statistically significant and demonstrate that there were applicants seeking mortgage loans for properties in African-American neighborhoods in the Chicago MSA from Townstone’s peers in much higher proportions than from Townstone.

It defined “statistically significant” as measuring the probability that an observed outcome could have occurred by chance. “As used in this complaint, an outcome is statistically significant if the probability that it could have occurred by chance is less than 5 percent,” the CFPB said in a footnote.

The Title Report will update this breaking news story.