After announcing several years ago that it intended to pick up with fair lending enforcement in the indirect auto finance market where the CFPB left off, the New York Department of Financial Services has announced two consent orders with smaller, New York-chartered banks based on the allegation that allowing auto dealers to negotiate the retail prices of retail installment contracts resulted in a disparate impact on the basis of race and national origin.
For readers who followed the CFPB’s efforts in this area, the allegations in these consent orders will be very familiar. The DFS asserted that the practice of allowing dealer “discretion” in setting retail interest rates resulted in statistically significant differences in pricing, disadvantaging Hispanic and African-American consumers, with differences ranging from 20 to 59 basis points. The consent orders do not specify the analytical method used to arrive at these disparity figures.
But despite the familiar allegations, there are a couple of notable points about these two consent orders. First, they represent the first effort by a state regulator to pursue the dealer finance charge issue against an assignee of retail installment contracts that we are aware of. Even if the CFPB is reluctant to pick this theory up again after the Congressional disapproval of its bulletin on indirect auto finance, the NYDFS’ interest in this issue could significantly impact auto finance companies subject to the agency’s jurisdiction.
Moreover, the forward-looking relief in one of the consent orders goes well beyond that required in the CFPB’s consent orders on this subject. One of the target banks had exited the indirect auto finance business in 2017, but for the other bank that was still operating, the consent order required the bank to adopt a flat-fee pricing model, with no exceptions. This extreme step seems to us to be tantamount to forcing the bank out of the indirect auto business; there were well-publicized examples of auto finance companies adopting flat fees during the period of the CFPB’s consent orders, and those flat-fee models, according to industry data, caused a dramatic reduction in those companies’ market shares, and the flat fee models were later abandoned.
We will be watching for more developments from NYDFS on this issue. But if the Department is intent on forcing auto finance companies into a flat-fee-only pricing model, it may compel companies with a larger indirect auto business to litigate one of these cases because of the overwhelming business implications of adopting such a model.