On October 6, the New York State Department of Financial Services (NYDFS) announced a consent order with Rhinebeck Bank (Rhinebeck) to resolve allegations that, in violation of New York Executive Law Section 296-a, the bank instituted discretionary dealer markup policies that resulted in a disparate impact that negatively affected members of minority groups.
In addition to a $950,000 fine and mandatory restitution to impacted borrowers, the consent order includes remediation requiring Rhinebeck to develop a compliance plan providing for updates to its automobile lending policy to limit dealer markups on retail installment contracts purchased by the bank. This consent order is a continuation of the pattern of dealer reserve actions by NYDFS, similar to two previous consent orders entered into in July 2021, both with smaller New York-chartered banks. All of these consent orders followed a 2018 announcement by NYDFS that it planned to take actions against indirect auto finance companies relating to dealer reserve, similar to those taken by the CFPB starting in 2013.
As background, Rhinebeck engages in indirect automobile lending, i.e., provides automobile dealers with the terms by which it will agree to immediately purchase loans from dealers. Rhinebeck sets a specified risk-based interest rate (Buy Rate) for approved applications but has a policy that allows automobile dealers to markup prospective borrowers’ interest rates above the Buy Rate. An automobile dealer’s compensation on the loan is based on the difference in projected interest revenue between the Buy Rate and the actual interest rate assigned to the consumer and is known as the “dealer markup.” According to NYDFS, between January 2017 and December 2020, Rhinebeck maintained a policy that permitted dealer markup of 2.5% on loans up to 66 months, 2% on loans 67 to 75 months, and 1.5% on loans 76 to 84 months at the dealer’s sole discretion.
According to NYDFS, its investigation revealed:
- Between January 1, 2017 and September 30, 2018, Hispanic borrowers were charged approximately 33 basis points more in discretionary dealer markups than non-Hispanic white borrowers.
- Between October 1, 2018 and August 31, 2020, Hispanic borrowers were charged approximately 32 basis points more in discretionary dealer markups than non-Hispanic white borrowers.
- Between January 1, 2017 and September 30, 2018, Black or African American borrowers were charged approximately 39 basis points more in discretionary dealer markups than non-Hispanic white borrowers.
- Between October 1, 2018 and August 31, 2020, Black or African American borrowers were charged approximately 31 basis points more in discretionary dealer markups than non-Hispanic white borrowers.
- Between October 1, 2018 and August 31, 2020, Asian borrowers were charged approximately 15 basis points more in discretionary dealer markups than non-Hispanic white borrowers.
Although NYDFS did not find evidence of any intentional discrimination, it found the bank’s policies and practices allowed automobile dealers to mark up a consumer’s interest rate above Rhinebeck’s established Buy Rate, which resulted in a disparate impact.
As part of the remediation, Rhinebeck is to submit a proposed compliance plan to NYDFS that includes: (1) conducting periodic portfolio-level assessments of the bank’s indirect automobile lending program designed to monitor for disparities and paying restitution to protected-class consumers who paid higher markups; (2) developing and implementing a dealer escalation program that includes parameters for when a dealer will be shifted to a flat-fee model; and (3) limiting dealer markup to 150-200 basis points, depending on the length of the contract term. This remediation approach differs significantly from NYDFS’s two 2021 consent orders; in those cases, one of the banks had exited the indirect auto finance market, but the other was required to adopt a flat-fee compensation structure for dealers. The Rhinebeck order contains no similar requirement, and it allows the bank to continue its current dealer compensation model, subject only to ongoing portfolio monitoring and remediation.
Rhinebeck denied the allegations and issued a statement stating: “This settlement reflects a striking departure by [NY]DFS from the current approach of virtually every federal and state banking regulator and enforcement agency on fair lending cases involving dealer reserve … . Dealers, not banks, determine how much markup to charge customers. Banks do not know the racial or ethnic characteristics of borrowers before a loan is originated. In fact, banks are prohibited by law from ever asking for that information, which means the [NY]DFS action is based on allegations where the affected customers are only presumed to be members of a particular race or ethnicity, based on their last name and geographic location, as a proxy for those borrower characteristics.” The bank further reasserted its commitment to fair lending practices. “Rhinebeck Bank is committed to treating its customers fairly and equitably and has abided by that commitment as reflected in its fair lending analysis, which shows consistent pricing across the Bank’s portfolio of loans offered directly to consumers by the Bank.”
We will continue to watch NYDFS’s activity with regard to dealer reserve and post updates here as they occur.