Judge blocks CFPB bid to undo Townstone redlining settlement

A federal judge on Thursday blocked an attempt by the Consumer Financial Protection Bureau (CFPB) to reverse a $105,000 settlement with Townstone Financial, a Chicago-based mortgage broker accused of discouraging Black applicants.

U.S. District Judge Franklin Valderrama ruled that allowing the CFPB to unwind the deal, finalized last year, “would erode public confidence in the finality of judgments” and open “a Pandora’s box.” He said such a move would imply that any new administration could revisit and nullify prior settlements simply because it disagrees with the original decision.

“Presumably, CFPB launched the lawsuit after it determined that there was a legal and factual basis for the suit,” Valderrama writes. “Apparently, that was not the case. Now, current CFPB leadership under the second Trump administration, in an act of legal hara-kiri that would make a samurai blush, falls on the proverbial sword and attests that the lawsuit lacked a legal or factual basis.”

Valderrama writes that while “it is impermissible for government agencies to target people or entities because of protected speech” neither his Court nor the Seventh Circuit addressed Defendants’ First Amendment argument. “Therefore, that issue was not adjudicated.”

Townstone defense attorneys react

Townstone Financial defense attorneys told HousingWire they are “deeply disappointed with the judge’s decision but respect it.” 

“We believe his decision does not fully reflect the actual facts of the case,” they stated. “However, a critical development underscores the injustice faced by Townstone; the CFPB’s own internal investigation acknowledged that Townstone did not engage in discriminatory practices and was instead targeted for its political speech.

“This extraordinary admission by the CFPB highlights serious concerns about regulatory overreach and the weaponization of enforcement actions against protected speech — issues that strike at the heart of fairness in our industry.”

Defense attorneys added that they remain committed to advocating for reforms to “prevent similar challenges for other companies” and “ensuring that regulatory actions are grounded in evidence, not political agendas.”

Case background

The original case stemmed from a July 2020 CFPB complaint alleging that Townstone engaged in practices that illegally discouraged prospective Black applicants from applying for mortgage loans.

At the time of filing the complaint, the CFPB argued that such speech — used in advertising that generated up to 90% of the company’s mortgage leads — was not protected by the First Amendment.

The agency claimed only 1.4% of Townstone’s Chicago loan applications came from Black applicants between 2014 and 2017 — compared to 9.8% for competitors.

The Trump-aligned CFPB leadership later reversed course, arguing that the case was politically motivated and that the bureau had abused its authority by using AI-powered software to analyze 78 hours of radio content.

The CFPB — now under leadership installed by the second Trump administration — sought to void its own settlement in a rare legal maneuver. The move drew sharp criticism from civil rights and consumer groups, who said undoing the agreement would set a “dangerous and destabilizing precedent.”

Those groups — including the ACLU, National Fair Housing Alliance, Consumer Federation of America and the National Consumer Law Center — filed a friend-of-the-court brief opposing the CFPB’s reversal.

Valderrama’s ruling aligns with their view that the agency cannot arbitrarily reverse a negotiated settlement, even under new leadership.

The CFPB’s retreat from multiple enforcement cases has prompted criticism within the agency.

CFPB Enforcement Chief Cara Petersen resigned Tuesday — writing in a farewell email that current leadership “has no intention to enforce the law in any meaningful way.”