Proposed CFPB rule protects creditors from censorship
Last week, the Consumer Financial Protection Bureau (CFPB) proposed a new rule amending the regulation that was used to censor PLF client Barry Sturner, former owner of a small mortgage brokerage firm, Townstone Financial, Inc.
If Regulation B is amended, CFPB officials will need evidence to prove that a creditor’s discriminatory and discouraging statements are directed at mortgage applicants or prospective applicants and that the creditor either knows or should know that his or her actions would lead to discrimination against an identifiable applicant or prospective applicant.
Regulation B and Townstone Financial
In 1974, Congress passed the Equal Credit Opportunity Act (ECOA) to prevent discrimination in lending based on sex or marital status—and it was later amended to prevent discrimination based on immutable characteristics, including race, color, religion, national origin, or age. Pursuant to congressionally delegated authority, the Federal Reserve Board issued Regulation B to implement the ECOA. While Congress eventually transferred the authority delegated under the ECOA to the Consumer Financial Protection Bureau, Regulation B’s text remained intact.
The ECOA declared it “unlawful for any creditor to discriminate against any applicant…on the basis of race, color, religion, national origin, sex or marital status, or age.” However, Regulation B changed the language of the ECOA. Rather than simply filling in the details of the ECOA, Regulation B unlawfully redefined and expanded the scope of agency power by including prohibitions on discouragement, giving broader authority to censor creditors.
Beginning around 2018, the CFPB targeted Barry Sturner and his small mortgage company, Townstone Financial, and dragged them through an intensive, three-year investigation for allegedly violating “Regulation B” of the Equal Credit Opportunity Act.
According to the CFPB, five brief statements made by Sturner and other Townstone employees over the course of four years “would [have] discourage[d]” mortgage applicants from applying for a loan at Sturner’s former firm, Townstone. The CFPB admitted that it had received no complaints about Sturner or Townstone and that it had zero evidence of discouragement or discrimination. Nonetheless, the CFPB concluded that the statements—made on a radio show and podcast—violated the ECOA and Regulation B simply because the CFPB did not like his speech.
With the help of Pacific Legal Foundation, Sturner and Townstone defended themselves against the CFPB’s allegations. Importantly, PLF argued that “Regulation B” misconstrued ECOA’s anti-discrimination statute. The ECOA precludes discrimination based on “race, color, religion, national origin, sex or marital status, or age.” But according to the existing version of Regulation B, discouragement is defined as “any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application,” (emphasis added). The CFPB latched onto the “would discourage” language as the basis for its complaint against Sturner and Townstone. And, as they well know, the “would discourage” standard gives the CFPB broad powers to censor anything that the agency perceives to be discouraging. Even if there is not tangible evidence that a statement discouraged an applicant or prospective applicant, the CFPB could allege that the creditor’s speech had the possibility of discouragement, which is exactly what the CFPB claimed in Townstone’s case.
After a three-year investigation and four years of litigation (a total of seven years), Sturner and Townstone settled with the CFPB and paid a $105,000 fine. But in March of 2025, the CFBP admitted that its lawsuit against Townstone was legally and factually baseless and that the agency unlawfully targeted Townstone’s speech, saying its actions were “abusive” and “unjust.”
Although the grueling legal battle ended, Townstone was still out $105,000 dollars, and the vague wording of Regulation B was still available to be abused again.
Agencies regularly wield vague rules, like Regulation B, to threaten citizens.
Thankfully, the new amendments proposed for Regulation B could significantly limit the CFPB’s power and improve business opportunities for creditors moving forward.
A win for creditors and free speech
The proposed rule amending Regulation B omits the “would discourage” language and adds clarifying language. The proposed regulation would prohibit statements that are “directed at applicants or prospective applicants,” and a creditor will be liable only if he or she “knows or should know [that his or her speech] would cause a reasonable person to believe that the creditor would deny, or would grant on less favorable terms, a credit application.” These changes will ensure that the CFPB can enforce the ECOA only against individuals who make statements that would lead a reasonable applicant or prospective applicant to believe the company will deny their application because of their race, sex, and other prohibited bases.
“Regulation B has been overly broad and vague for decades, leading enforcement agencies to enjoy broad power to threaten creditors with financial ruin for saying things that Washington bureaucrats found offensive,” said Steve Simpson, director of the Separation of Powers litigation group at Pacific Legal Foundation. “This was a flagrant violation of the rule of law and freedom of speech. The new rule is a significant improvement.”
