In an extraordinary move stemming from a 2020 redlining lawsuit, an official working with the Consumer Financial Protection Bureau (CFPB) at the behest of the White House Office of Management and Budget (OMB) alleges that the bureau improperly sought a lawsuit against Chicago-based nonbank mortgage lender and brokerage Townstone Financial, according to court filings reviewed by HousingWire.
Dan Bishop, who said he is employed as a senior adviser to OMB under the direct supervision of the office’s head, Russell Vought, testified that Vought directed him to “undertake a general review” of CFPB enforcement activities and examine its handling of the Townstone matter. The conclusion of the filing is that the CFPB “supports vacating the consent judgment, dismissing the claims, and permitting the agency to return to Townstone the civil penalty Townstone paid.”
Investigative timeline as alleged
“The documents I reviewed make clear that the CFPB lacked a sufficient factual predicate for the seven-year saga to which it subjected defendant Townstone,” Bishop said. “Those documents also make clear that agency lawyers misled their superiors in enforcement decisions and were affected by animus toward the publicly expressed viewpoints of Townstone’s owner.”
The testimony goes on to allege that the CFPB investigation of the lender commenced after running a “redlining screen” on data it submitted via the Home Mortgage Disclosure Act (HMDA). This led CFPB fair lending staff to recommend an investigation, categorizing “repeat and referral applications” as possible reasons for having “few from African-American and Hispanic customers,” Bishop said.
Bureau employees also allegedly said that Townstone’s sole owner, Barry Sturner, encouraged the origination of mortgages to “low-income applicants” and told them company had “never had an African-American loan officer.”
Bishop also details how the bureau allegedly used audio analytics mining software to determine that a radio show hosted by the company was “overtly political” and generally critical of the bureau. But the highlighted remarks comprised only 0.33% of the total 78.5 hours of captured audio content, he said.
In an interview with HousingWire, Marx Sterbcow, managing attorney of Sterbcow Law Group — who assisted in representing Townstone in this case — called this a “disturbing aspect” of the bureau’s alleged conduct.
“If people had actually listened to the full audio recordings — just as both the CFPB’s own internal consumer testing and our independent testing did — there was nothing offensive,” he said.
In the filing, Bishop suggests that CFPB staff aimed to “keep pressing ahead on the matter” to further assess the company’s “views on race and racism.” They cited “intentional discrimination in the marketplace” and a “strong need for deterrence.”
In a memo to then-CFPB director Kathleen Kraninger, bureau employees allegedly stated that the investigation “revealed direct evidence” of discrimination in the remarks captured from the radio show, and that the bureau had a “strong case” of violations of Regulation B under the Equal Credit Opportunity Act (ECOA).
The memo also reportedly said that “circumstantial evidence could support the conclusion that engaged in acts or practices” that could have discouraged applicants from minority neighborhoods, the filing reads.
Alleged misstating of enforcement guidance
Bishop contends the memo either omitted or misstated that under Regulation B, statements must “express an explicit racial preference,” and that if there had been a violation then “damages would be limited to those caused by specific statements.” No evidence was included that “any person heard or was affected” by the captured remarks, the filing states.
Kraninger reportedly asked for additional information about the demographics of the radio station and “guidance about race-conscious remedies,” alleging that investigators in May 2019 “omitted to advise of Supreme Court guidance” to avoid race-conscious remedies.
In August 2019, Townstone responded to the allegations in a 165-page court filing that included a survey of Black respondents by a consumer testing firm of the segments that CFPB investigators “singled out.”
There was also a “statistical analysis by a mortgage industry compliance firm comparing” the company’s applications and originations to certain peers. The filing states that the respondents “found no offense” in the remarks, nor that Townstone was an outlier in lending to Black applicants.
Two days later, the filing says that CFPB investigators responded to the filing dismissively, prompting more questions from Kraninger. For the next seven months, the filing alleges, enforcement staff circulated additional material on the matter without including the director. In the summer of 2020, bureau staff reportedly captured tweets from Sturner that were critical of looting in the wake of the murder of George Floyd.
Ultimately the suit was filed in July 2020, with the filing alleging that Kraninger was induced into approving the filing of the suit. In October 2020, Townstone moved to have the case dismissed. A federal judge in Illinois ruled in favor of Townstone in February 2023, but the CFPB vowed to appeal, which ultimately resulted in its authority under ECOA being reaffirmed by a three-judge panel.
Where things could go next
Sterbcow described a need for additional oversight of the CFPB.
“The bureau serves a very important function in the country, and no one wants to see it go away,” he said. “However, based on this case — and several others — there have been instances of massive abuse, overreach, and a lack of oversight within certain departments.”
He added that this serves as “probably the most egregious example of that misconduct that I’ve ever encountered.” Sterbcow expects congressional hearings to take place on the matter, but the judge will likely want to take the time to properly assess the new material in the case.
“The bureau desperately needs structural reform,” Sterbcow said. “We cannot have an agency that picks and chooses cases based on political leanings or to push certain agendas. The CFPB has been aggressively using regulation by enforcement to advance political goals.”
