CFPB Files Order to Stop Townstone Financial’s Unlawful Redlining

The Consumer Financial Protection Bureau (CFPB) has filed a proposed order to resolve its case against Townstone Financial for discriminatory lending practices and redlining African American neighborhoods in Chicago. If entered by the court, the proposed order would prohibit Townstone from taking any actions that violate the Equal Credit Opportunity Act (ECOA) and require it to pay a $105,000 penalty to the CFPB’s victims relief fund. The action follows lengthy contested litigation and a unanimous July 2024 decision from the U.S. Court of Appeals for the Seventh Circuit that the ECOA prohibits lenders from discouraging prospective applicants on a prohibited basis from applying for loans.

Townstone was a nonbank retail-mortgage creditor and broker based in Chicago through 2018. Some 90% of Townstone’s mortgage lending was in the Chicago metro. From 2014-2017, Townstone was in the top 10% of lenders in applications from the Chicago metro, receiving an average of 740 mortgage loan applications annually. Townstone ended mortgage lending in 2018 during the CFPB’s investigation, and is now solely a mortgage broker. 

In 2020, the CFPB sued Townstone for discouraging potential applicants because of their race or the racial composition of where they lived or sought to live. Townstone’s advertising, marketing, and business practices discouraged African Americans from applying for credit and actively avoided the credit needs of African American applicants and African American neighborhoods in the Chicago metro.

Townstone drew only five or six applications a year for properties in neighborhoods that were more than 80% African American, despite those neighborhoods being nearly 14% of census tracts in the Chicago metro, and over half of the applications it did draw were from white applicants. From 2014-2017, barely 2% of Townstone’s mortgage-loan applications were for properties in majority African American neighborhoods, even though they make up nearly 19% of the Chicago metro’s census tracts.

Under the Consumer Financial Protection Act, the CFPB has the authority to take action against institutions violating consumer-financial protection laws, including the Equal Credit Opportunity Act and the Consumer Financial Protection Act. If entered by the court, the proposed order would require Townstone to pay a $105,000 penalty, which will be deposited into the CFPB’s victims relief fund. If Townstone violates the ECOA again, it could find itself in contempt of the court order and face further sanctions.

Read the proposed order.

Read the November 1, 2024 CFPB press release.

CFPB and Justice Department Charge Fairway for Redlining Black Neighborhoods in Birmingham, Alabama

The Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) took action to end Fairway Independent Mortgage Corporation’s illegal mortgage lending discrimination against majority-Black neighborhoods in the greater Birmingham, Alabama area. The CFPB and DOJ allege that Fairway illegally redlined Black neighborhoods, including through its marketing and sales actions. Fairway’s actions discouraged people from applying for mortgage loans in the Birmingham metropolitan area’s Black neighborhoods. If entered by the court, the settlement would require Fairway to pay a $1.9 million civil penalty to the CFPB’s victims relief fund. Fairway would also be required to provide $7 million for a loan subsidy program to offer affordable home purchase, refinance, and home improvement loans in majority-Black neighborhoods. Redlining is the illegal practice of denying the same access to credit to certain neighborhoods based on the racial or ethnic composition of those areas. 

Fairway is a non-depository mortgage company based in Madison, Wisconsin, and operates in the Birmingham area under the trade name MortgageBanc. In 2023, Fairway was the third largest mortgage lender, receiving over 100,000 applications and originating over $24 billion in loans. In this closely held company, Steve Jacobson is the majority owner.

The complaint describes how Fairway redlined majority-Black neighborhoods in the Birmingham Metropolitan Statistical Area (Birmingham MSA). During the period covered by the complaint, the Birmingham MSA included six counties in north central Alabama with a population of about 1.1 million. While Fairway claimed to serve the entire metropolitan area, it concentrated all its retail loan offices in majority-white areas, directed less than 3% of its direct mail advertising to consumers in majority-Black areas during 2018-2020, and discouraged homeownership in majority-Black areas by generating loan applications at a rate far below its peer institutions.

The CFPB and DOJ allege that Fairway violated the Equal Credit Opportunity Act, the Consumer Financial Protection Act, and the Fair Housing Act. Specifically, the government alleges problematic conduct by Fairway including:

• Failing to address known signs of discrimination: Fairway's own data showed that it was failing to serve majority-Black neighborhoods in the Birmingham area. Before October 2022, it took no steps to address redlining risk other than telling loan officers not to discriminate. Only 3.7% of Fairway’s applications during 2018-2022 were for properties in majority-Black areas, compared to 12.2% for similar lenders. This disparity was higher in neighborhoods with 80% or more Black residents, where it made loans at less than 1/8 the rate of its peer lenders. Fairway did not adopt any written plan for marketing or growth to address the concern.

• Redlining Black neighborhoods: From 2015 through 2022, Fairway operated three retail loan offices and three loan production desks in real estate offices in the Birmingham metropolitan area, all in majority-white areas. Fairway also relied on referrals from real estate professionals and others to generate applications, and the vast majority of Fairway’s referral sources and referred consumers were located in majority-white areas. Fairway predominantly directed its marketing to majority-white areas. By doing this, Fairway unlawfully discouraged mortgage loan applications for properties in majority-Black neighborhoods.

Under the Consumer Financial Protection Act of 2010 (CFPA), the CFPB has the authority to take enforcement action against institutions that violate federal consumer financial protection laws, including violations of the Equal Credit Opportunity Act and its implementing regulation, Regulation B. The DOJ agreed with CFPB’s claim that Fairway violated the Equal Credit Opportunity Act and its implementing regulation, and separately alleges that Fairway violated the Fair Housing Act.

The proposed order filed by CFPB and DOJ would require Fairway to:

• Pay a $1.9 million penalty: The penalty against Fairway would be paid into the CFPB’s Civil Penalty Fund, also referred to as the victims relief fund.
• Provide $7 million for a loan subsidy program: The order would require Fairway to offer home purchase, refinance, and home improvement loans on a more affordable basis than otherwise available in majority-Black neighborhoods in the Birmingham metropolitan area.
• Pay at least $1 million to serve neighborhoods it redlined to address some of the gap in credit access caused by its discriminatory activities. Fairway would be required to open or acquire a new loan production office or full-service retail office in a majority-Black neighborhood in the Birmingham metropolitan area, and will pay (2) at least $500,000 for advertising and outreach, (3) at least $250,000 on consumer financial education, and (4) at least $250,000 on partnerships with community-based or governmental organizations to serve neighborhoods previously redlined by the company.

Read the proposed order.

Consumers can submit complaints about financial products and services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their company has violated federal consumer financial protection laws are encouraged to send information about what they know to whistleblower@cfpb.gov. To learn more about reporting potential industry misconduct, visit the CFPB’s website.

The Fair Lending Report of the Consumer Financial Protection Bureau (CFPB) for 2023 is Released

 

The June 2024 Fair Lending Report describes CFPB's fair lending activities in enforcement, guidance and rulemaking, interagency coordination, and outreach and activities for calendar year 2023. It is submitted to Congress. The fair lending activities of the CFPB are summarized here.

Fair Lending Activities

In 2023 the CFPB focused much of its fair lending supervision efforts on: mortgage origination (including redlining, property valuation bias, and HMDA and Regulation C compliance); credit card marketing and the use of alternative data in digital marketing; and on the use of automated systems and models, sometimes marketed as artificial intelligence (AI) and machine learning models, in credit card
originations.

The CFPB’s 2023 mortgage origination work continued to focus on redlining (intentional discrimination against applicants and prospective applicants living or seeking credit in minority neighborhoods, including by discouragement). The CFPB’s mortgage work also included assessing potential discrimination in mortgage underwriting and pricing processes, including assessing whether there were disparities in application, underwriting, and pricing processes, and whether there were weaknesses in fair lending-related compliance management systems. The CFPB’s mortgage origination work also included reviewing residential property appraisal service providers to identify risks that may arise due to potential discrimination or bias as well as HMDA data integrity and validation reviews.

The CFPB continued to assess whether lenders complied with the adverse action notice requirements of the Equal Credit Opportunity Act (ECOA) and Regulation B and evaluated whether lenders maintain policies and procedures that unlawfully exclude property on the basis of geography in underwriting decisions, unlawfully exclude certain types of income, and treat criminal history in an unlawful manner. 

Fair Lending Enforcement

In fair lending enforcement, the CFPB:

(1) Did two ECOA-related public enforcement actions, relating to discrimination on the basis of race and national origin, one against Citibank N.A. (Citibank) and the other against Colony Ridge Development, LLC, and Colony Ridge BV, LLC, and affiliate mortgage company Colony Ridge Land, LLC (collectively, the Colony Ridge defendants).

(2) Took public enforcement actions against two repeat offenders for reporting false, erroneous, or incorrect HMDA data: Freedom Mortgage Corporation (Freedom Mortgage) and Bank of America, N.A.

(3) On October 10, 2023, the CFPB filed a lawsuit against Freedom Mortgage, a residential

mortgage loan originator and servicer, alleging that it submitted legally-required mortgage loan

data that were riddled with errors.

(4) On November 28, 2023, the CFPB issued an order against Bank of America for routinely

submitting falsified HMDA data.5 The CFPB found that between 2016 and late 2020, hundreds

of Bank of America’s loan officers failed to ask applicants for their race, ethnicity, and sex, as

required by law, and instead falsely recorded that the applicants chose not to provide this

information.

(5) In 2023, the CFPB issued several fair lending-related Matters Requiring Attention and entered
Memoranda of Understanding directing entities to take corrective actions that the CFPB will
monitor through follow-up supervisory actions. In these communications, the CFPB directed
mortgage lenders to correct violations relating to redlining, including by institutions providing
consumer remediation designed to spur lending in redlined areas.

Read the full June 2024 CFPB report.

CFPB and Justice Department Sue Developer and Lender for Bait-and-Switch Land Sales and Predatory Financing

The Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice have sued Colony Ridge, a Texas-based developer and lender, for operating an illegal land sales scheme and targeting thousands of Hispanic borrowers with false statements and predatory loans. Colony Ridge allegedly sells unsuspecting families flood-prone land without water, sewer, or electrical infrastructure, and that the company sets borrowers up to fail with loans they cannot afford. Roughly 1-in-4 Colony Ridge loans ends in foreclosure, after which the company repurchases the properties and sells them to new borrowers. The CFPB and Justice Department are seeking redress for borrowers harmed by Colony Ridge and an immediate end to its illegal practices. This is the CFPB’s first federal court lawsuit charging a defendant with violations of the Interstate Land Sales Full Disclosure Act.

The lawsuit names as defendants three Texas-based Colony Ridge affiliate companies, as well as Loan Originator Services, a nonbank mortgage company licensed to originate loans in Texas. Colony Ridge has developed more than 40,000 lots spread across an unincorporated area of Liberty County, Texas, approximately 30 miles northeast of Houston. Colony Ridge markets these subdivisions using the names “Terrenos Houston” and “Terrenos Santa Fe.”

Colony Ridge targets Spanish-speaking borrowers: it advertises almost exclusively in Spanish, often in social media posts featuring, for example, national flags and regional music from Latin America. In these advertisements, Colony Ridge promises consumers the dream of home ownership with its own seller financing: an easy-to-obtain loan product that requires no credit check and only a small deposit. The complaint alleges that Colony Ridge has lured thousands of Hispanic consumers into their predatory loan products. Foreclosure and property deed records from September 2019 through September 2022 show that Colony Ridge initiated foreclosures on at least 30% of seller-financed lots within just three years of the purchase date, with most loan failures occurring even sooner. Records also confirm that Colony Ridge accounted for more than 92% of all foreclosures recorded in Liberty County between 2017 and 2022.

Specifically, the complaint filed today alleges that Colony Ridge:

• Misleads borrowers about infrastructure on the lots it sells: Colony Ridge has falsely represented that lots in the Terrenos Houston subdivisions were sold with water, sewer, and electrical infrastructure already in place. The complaint cites numerous advertisements, including TikTok videos where the company makes claims like “Terrenos Houston tiene todos los servicios de ciudad por cada terreno” (“Terrenos Houston has all city services for each lot.”). After applicants pay a non-refundable deposit, Colony Ridge discloses the properties may not provide those services and says it only in English.
• Sells lots that flood with rain and raw sewage: The complaint alleges that Colony Ridge employees fail to inform borrowers of flood risk when lots have repeatedly flooded in the past, or falsely tells them the lots have not flooded. In fact, in parts of the Terrenos Houston subdivision, rain causes significant flooding, causing raw sewage to run through or around borrowers’ property, and damaging their personal belongings.
• Churns through borrowers in a cycle of foreclosure: When families fall behind on payments and enter foreclosure, it allows Colony Ridge to “flip” the properties by repurchasing and reselling them, often at higher prices. Foreclosure and property deed records show that Colony Ridge flipped at least 40% of all the properties it sold between September 2019 and September 2022, selling approximately 8,237 properties twice, 3,267 properties three times, and 2,067 properties four or more times in three years.
• Targets Hispanic consumers with predatory loans: Through direct-to-consumer marketing on websites, social media engagement, and telemarketing, Colony Ridge targets Hispanic consumers. Colony Ridge then exploits language barriers during its sales process and uses high-pressure sales tactics to push borrowers to obtain their loan products quickly. The loans have exorbitant interest rates. Between 2017 and 2021, interest rates on Colony Ridge’s loans ranged from between 10.9% to 12.9%, while a standard 20-year fixed rate loan averaged 2.35% to 4.05% during the same timeframe. And in extending the loan, Colony Ridge and Loan Originator Services did not collect information needed to determine if applicants can afford the loan.
• Exploits language barriers at borrowers’ expense: While Colony Ridge conducts most of its marketing activities in Spanish, when it comes to the actual transaction, it offers important documents only in English. Failing to offer borrowers accurate translations of contracts, deeds, and other documents in the language in which it conducts the sales and exploiting borrowers’ limited English proficiency violates federal law.

The CFPB alleges that defendants unlawfully discriminated against applicants on the basis of their race or national origin in violation of the Equal Credit Opportunity Act and its implementing regulation. The CFPB separately alleges that Colony Ridge engaged in unlawful deception and violated the Interstate Land Sales Full Disclosure Act and its implementing regulations. The Justice Department joined the CFPB’s claim of a violation of the Equal Credit Opportunity Act and its implementing regulation, and separately alleges that Colony Ridge violated the Fair Housing Act. The complaint seeks to stop Colony Ridge’s alleged unlawful conduct, provide redress for affected consumers, and impose a civil penalty payable to the CFPB victims relief fund. If the defendants are found liable, the amount of any restitution will be determined in the litigation in federal court.

Read today’s complaint.

The CFPB’s website has resources about credit discrimination and mortgages. Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees of companies who believe their company has violated federal consumer financial protection laws are encouraged to send information about what they know to whistleblower@cfpb.gov.

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Read the December 20, 2023 CFPB article.

Read the December 20, 2023 Justice Department release.

 The CFPB and FTC Accuse TransUnion of Illegal Rental Background Check and Credit Reporting Practices

The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) have requested a federal court to order penalties for the rental screening subsidiary of TransUnion for violations of the Fair Credit Reporting Act. TransUnion: (a) did not make sure that the rental background checks that landlords use to evaluate renters were accurate, and (b) withheld from renters the names of third parties that provided the inaccurate information. The CFPB and FTC's request is to fine TransUnion $15 million for its illegal behavior, stop illegal tenant screening practices,  and make significant improvements to how it reports evictions. Regarding the financial penalty, $11 million would be paid to consumers and $4 million would go to the CFPB's victims relief fund.

Separately, the CFPB has ordered TransUnion to pay $8 million for lying to thousands of consumers about when it placed or removed security freezes and locks on credit reports. TransUnion told consumers the requests were completed when instead the requests joined its multi-year backlog. It also did not keep active-duty members of the military from pre-screened solicitation lists – which protects servicemembers from identity theft. 

The 2018 Fair Credit Reporting Act required TransUnion and other credit reporting companies to offer free security freezes to the public and enhanced protections for active-duty members of the military. This Act also requires that companies respond timely to consumer requests to place or remove security freezes – which with credit locks helps prevent potential identity theft by blocking many third parties from accessing consumers’ credit reports.

TransUnion had annual revenue in excess of $3.7 billion in 2022, and collects information on over 200 million Americans, including information on their payment histories, debt loads, maximum credit limits, current creditors, and related credit relationships. It provides security freezes and security locks of individuals’ consumer reports. TransUnion previously had been accused of improprieties by the CFPB. Those and the current enforcement action stemmed from CFPB's investigations and reports.

Read today’s CFPB and FTC joint complaint and proposed order.

Read today’s CFPB order.

Learn more about credit reports and scores.

Read the CFPB’s 2023 report on consumer complaints about TransUnion and the other two nationwide consumer reporting companies.

Read the remarks of Eric Halperin, the CFPB’s Assistant Director of Enforcement, on today’s actions.

Consumers can submit complaints about financial products and services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Read the October 12, 2023 CFPB article.

Fed Regulator Warns AI & Machine Learning Can Worsen Lending Bias

AI & Automated Decisions Determine Credit Rating, Loan Terms, Hiring, Housing, etc. 

“While these technologies have enormous potential, they also carry risks of violating fair lending laws and perpetuating the very disparities that they have the potential to address,” the Fed’s vice chair of supervision, Michael Barr, said at the recent National Fair Housing Alliance (NFHA) 2023 national conference. While new artificial intelligence tools could cheaply expand credit to more people, machine learning and AI may also worsen bias or inaccuracies inherent in data used to train the systems or make inaccurate predictions.

As concerns grow over increasingly powerful artificial intelligence systems like ChatGPT, the nation’s financial watchdog says it’s working to ensure that companies follow the law when they’re using AI. Automated systems and algorithms help determine credit ratings, loan terms, bank account fees, and other aspects of our financial lives. AI also affects hiring, housing and working conditions.

In the past year, the Consumer Finance Protection Bureau said it has fined banks over mismanaged automated systems that resulted in wrongful home foreclosures, car repossessions, and lost benefit payments, after the institutions relied on new technology and faulty algorithms.

One problem is transparency. Under the Fair Credit Reporting Act and Equal Credit Opportunity Act, for example, financial providers legally must explain any adverse credit decision. Those regulations likewise apply to decisions made about housing and employment. Where AI make decisions in ways that are too opaque to explain, regulators say the algorithms shouldn’t be used. “I think there was a sense that, ‘Oh, let’s just give it to the robots and there will be no more discrimination,’” Chopra said. “I think the learning is that that actually isn’t true at all. In some ways the bias is built into the data.”

EEOC Chair Charlotte Burrows said there will be enforcement against AI hiring technology that screens out job applicants with disabilities, for example, as well as so-called “bossware” that illegally surveils workers. The Fed recently announced two policy initiatives to address appraisal discrimination in mortgage transactions. Under the proposed rule, institutions that engage in certain credit decisions would be required to adopt policies, practices, and control systems that guarantee a “high level of confidence” in automated estimates and protect against data manipulation.

In April, 2023, about one-fourth of federal agencies, including the Federal Trade Commission and the Department of Justice, announced their commitment to cracking down on automated systems that cause harmful business practices.

Sam Altman, the head of OpenAI, which makes ChatGPT, said government intervention “will be critical to mitigate the risks of increasingly powerful” AI systems, suggesting the formation of a U.S. or global agency to license and regulate the technology. The Electronic Privacy Information Center said the agencies should do more to study and publish information on the relevant AI markets, how the industry is working, who the biggest players are, and how the information collected is being used - like regulators have done with previous new consumer finance products and technologies.

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Read the July 19, 2023 The Hill article.

Read the June 15, 2023 Federal Times article.