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Modern-Day Redlining: Understanding the Townstone Financial Settlement
In a recent development that has caught the attention of the mortgage industry, Chicago-based brokerage Townstone Financial has settled a lawsuit with the Consumer Financial Protection Bureau (CFPB) over allegations of what the bureau terms “modern-day redlining.” This case raises important questions about how we define and identify discriminatory lending practices in today’s financial landscape.
Understanding Modern-Day Redlining
Modern-day redlining refers to discriminatory practices that limit people of color’s access to financial products, banking services, and loans. Typically, it manifests in three main forms:
- Higher-cost financial products
- Limited access to credit
- Reverse redlining – targeting specific geographic areas with unfair credit terms
The Townstone Case: Context and Controversy
The case centers around a weekend radio show hosted by Townstone loan officers – a common marketing format in the industry where lenders purchase airtime for financial discussion programs. During these shows, the hosts, who grew up in the area they served, would reminisce about their childhood, including stories about a local corner grocery store they nicknamed “the jungle” due to its cluttered, maze-like interior filled with boxes of produce and merchandise.
The CFPB took issue with this terminology, examining the demographics of the neighborhood where the store was located and interpreting the term as potentially discriminatory, despite the hosts’ insistence that they were simply referring to the store’s physical appearance from their childhood memories.
A Broader Industry Perspective
What makes this case particularly interesting is how it contrasts with standard industry practices, particularly Loan Level Price Adjustments (LLPAs). These adjustments, which are standard practice at institutions like Fannie Mae and Freddie Mac, arguably fit the technical definition of modern-day redlining more closely than the Townstone case:
- They result in higher costs for borrowers with lower credit scores and higher loan-to-value ratios
- They can limit access to credit for certain borrowers
- They disproportionately affect certain geographic areas
The Settlement Reality
aThe resolution of this case through settlement highlights a crucial aspect of regulatory enforcement: when federal agencies pursue settlements, they often achieve them regardless of the merits of the case. This reality often leads institutions to settle rather than engage in prolonged legal battles.
Industry Implications
This case raises important questions about the definition and application of modern-day redlining regulations. While the intent behind anti-discrimination laws is crucial for ensuring fair lending practices, the Townstone case demonstrates the complexities of applying these regulations in practice. It also highlights potential inconsistencies in how different practices within the lending industry are evaluated and regulated.
The presence of standardized practices like LLPAs, which technically meet the criteria for modern-day redlining but remain industry standard, suggests a need for clearer guidelines and more consistent application of anti-discrimination regulations across the financial sector.
