A Small Business Complained About Crime in Chicago. Then the Feds Came After It.

The Consumer Financial Protection Bureau in 2017 began investigating Townstone Financial, a small mortgage company in Chicago, over possible violations of civil rights law.

The bureau bars lenders from making statements that “discourage” minorities from applying for loans. Townstone may have violated that regulation, the agency said, when its employees discussed crime in Chicago on a company-hosted radio show about the mortgage market, which also advertised Townstone’s services.

The offending statements, plucked from five episodes recorded over a three-year period, included a reference to the South Side of Chicago as a “war zone,” as well as a recommendation that home sellers “take down the Confederate flag.” Merely mentioning the flag, the agency argued, could scare off black applicants.

Facing a possible lawsuit and potentially stiff penalties, Townstone in 2019 retained a consumer testing firm, Kleimann Communication Group, to see if the remarks did in fact alienate African Americans.

The results were reassuring: Not a single black Chicagoan interviewed by the firm found the radio segments offensive, according to a copy of the firm’s report obtained by the Washington Free Beacon. Some even said they were more inclined to use Townstone for mortgages after hearing its employees’ banter, which they found funny and relatable.

But in July 2020—two months after the death of George Floyd—the bureau sued Townstone anyway.

What followed was an unprecedented legal battle between a small business with under 10 employees and a powerful federal agency that claimed to know better than the consumers it was allegedly protecting. {snip}

Such claims are usually levied at big banks with deep pockets. Townstone marked the first time the bureau, set up in 2010 by Elizabeth Warren, had brought a redlining complaint against a non-bank mortgage lender, which would struggle to afford the multimillion-dollar payouts typical of a settlement with the agency.

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While the odds are stacked against the agency in both venues—the Seventh Circuit, like the High Court, is majority-conservative—the persistence illustrates how government bureaucrats, armed with the mandate of civil rights, can bully and bankrupt businesses for constitutionally protected speech.

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It is doubtful that anyone complained to the agency about these statements, said Ted Frank, a well-known conservative attorney who tackles regulatory overreach. Instead, agency officials likely noticed that Townstone made fewer loans in black neighborhoods than others and began poking around.

African Americans only accounted for just 1.4 percent of Townstone’s loan applications between 2014 and 2017, according to the agency’s complaint, and less than 1 percent of its loans were for properties in predominantly black neighborhoods, which comprise around 14 percent of Chicago’s population.

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“If you don’t have proportional representation among loan recipients, agencies will look for disparate impact and go after you,” Frank said. “It’s problematic to see Kendism”—a reference to “antiracist” activist Ibram X. Kendi, who argues that all racial disparities reflect racism—”be the official policy of the U.S. government.”

Something like that policy has now been written into the Consumer Financial Protection Bureau’s operations manual. The bureau said last year that it would sue lenders for disparate impact “regardless of whether it is intentional,” something Congress never authorized it to do.

It was the latest move by an agency that has long taken an expansive view of its mandate, at times interpreting laws to cover far more conduct than their plain text implies.

The Townstone litigation centers on the Equal Credit Opportunity Act, which makes it illegal to “discriminate against any applicant” for credit on the basis of race. The agency has interpreted that law to include “prospective applicants” in addition to actual ones—a potentially massive category. {snip}

The argument was so bold that Franklin U. Valderrama, the district court judge presiding over the case, didn’t address the First Amendment issues in his opinion. He dismissed the lawsuit purely on separation of powers grounds, saying the bureau, an Executive Branch agency, had ignored the clear meaning of a congressionally enacted law. For now, it remains an open legal question whether lenders can speak candidly about crime.

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