At a U.S. Justice Department (DOJ) interagency event in Newark, New Jersey, Consumer Financial Protection Bureau (CFPB or Bureau) Director Rohit Chopra announced the next phase in the Bureau’s attempt to eliminate what he referred to as modern-day redlining: discriminatory targeting also known as reverse redlining. Since October 2021, the CFPB and DOJ have jointly prioritized digital redlining, including algorithmic bias, and exclusionary conduct by mortgage lenders. According to Director Chopra, “discriminatory targeting is the act of directing predatory products or practices at certain groups, neighborhoods, or parts of a community.” This “reverse redlining” theory has been invoked in enforcement actions in the past, but only very rarely.
The CFPB’s efforts in this area are already underway. As discussed here, on April 14, the Bureau submitted a statement of interest to the U.S. District Court for the Southern District of Florida in Roberson v. Health Career Institute, LLC, et al., arguing that the Equal Credit Opportunity Act’s (ECOA) prohibition on discrimination covers every aspect of an applicant’s dealings with a creditor, not just the specific terms of a loan (like the interest rate or fees). There, a putative class of Black students enrolled at a for-profit nursing school, alleged that after the school arranged for students to take out federal and private student loans to pay for the program, it adopted new policies that increased the amount of time and money it would take students to complete the program. The plaintiffs further alleged that the school intentionally targeted its program to individuals on the basis of race, with the understanding that they were more likely to require an extension of credit to pay for the program.
As Director Chopra sees it, “[t]he law is clear — discriminatory targeting violates [ECOA] when a company targets consumers on a prohibited basis for harmful and predatory loans — and courts have consistently upheld this. While each case is unique, courts have recognized discriminatory targeting claims when creditors target, on a prohibited basis, predatory lending acts or practices, such as equity stripping, bait-and-switch schemes, churning through foreclosures or repossessions, and misrepresenting costs to induce credit applications.”
Notably, earlier this year the CFPB unsuccessfully attempted to expand the scope of ECOA to include prospective applicants. In CFPB v. Townstone Financial, Inc., the Bureau brought a case against a Chicago mortgage lender for purportedly discouraging prospective Black applicants from applying for mortgages. The Illinois federal court dismissed the case, finding that ECOA did not prohibit or discuss conduct prior to the filing of an application. This ruling calls into question the legal basis for much of CFPB’s approach as outlined by Director Chopra. [Townstone and its implications are discussed in our podcast, available here.]
Director Chopra concluded his remarks vowing to continue to work with the DOJ, federal agencies, and states to hold lenders that engage in discriminatory targeting accountable. We will be watching to see if the “reverse redlining” claim becomes more prevalent than the very occasional instances we have observed in the past.