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 mark-up policies that resulted in a disparate impact that affected negatively the members of minority groups.
In addition to a $950,000 fine and mandatory restitution to affected borrowers, the consent order includes a remedy requiring Rhinebeck to develop a compliance plan that includes updates to its auto loan policy to limit dealer profit margins on bank-purchased retail contracts. This Consent Order is a continuation of the Dealer Reserve Action Model by NYDFS, similar to two previous consent orders concluded in July 2021, both with small New York chartered banks. All of these consent orders followed a 2018 announcement by NYDFS that it planned to take action against indirect auto finance companies regarding dealer reserve, similar to those taken by the CFPB beginning in 2013.
In the background, Rhinebeck engages in indirect auto loans, that’s to say, provides auto dealers with terms on which it agrees to purchase dealer loans immediately. Rhinebeck sets an interest rate based on the specified risk (purchase rate) for approved applications, but has a policy that allows car dealerships to mark up interest rates for potential borrowers above the purchase rate . A car dealer’s compensation on the loan is based on the difference in projected interest earnings between the purchase rate and the actual interest rate assigned to the consumer and is known as the “dealer’s margin”. According to NYDFS, between January 2017 and December 2020, Rhinebeck maintained a policy allowing a dealer mark-up of 2.5% on loans up to 66 months, 2% on loans 67-75 months, and 1.5 % on 76-84 month dealer loans. 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 markup than non-Hispanic white borrowers.
- Between October 1, 2018 and August 31, 2020, Hispanic borrowers were charged about 32 basis points more in dealer discretionary margins 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 markup 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 dealer discretionary margins than non-Hispanic white borrowers.
- Between October 1, 2018 and August 31, 2020, Asian borrowers were charged about 15 basis points more in dealer discretionary margins than non-Hispanic white borrowers.
Although NYDFS found no evidence of intentional discrimination, it did find that the bank’s policies and practices allowed car dealerships to mark up a consumer’s interest rate above the purchase rate established by Rhinebeck. , resulting in a disparate impact.
As part of the remediation, Rhinebeck must submit a proposed compliance plan to NYDFS that includes: (1) performing periodic portfolio-level assessments of the bank’s indirect auto lending program designed to monitor discrepancies and pay compensation to protected class consumers who paid higher markups; (2) develop and implement a dealer escalation program that includes metrics for when a dealer will transition to a flat rate model; and (3) limit the dealer mark-up to 150-200 basis points, depending on the length of the contract. This remediation approach differs significantly from the two 2021 consent orders from the NYDFS; in these cases, one of the banks had exited the indirect auto finance market, but the other was required to adopt a flat fee structure for dealerships. The Rhinebeck order contains no similar requirement and allows the bank to continue with its current dealer compensation model, subject only to continued portfolio monitoring and correction.
Rhinebeck denied the allegations and Posted a statement stating: “This settlement reflects a striking departure from [NY]DFS of the current approach of virtually all federal and state banking regulators and enforcement agencies on fair lending cases involving the dealer reserve…. Dealerships, not banks, determine how much markup to charge customers. Banks do not know the racial or ethnic characteristics of borrowers before granting a loan. In fact, the law prohibits banks from requesting this information, which means that [NY]DFS’s action is based on allegations that the affected customers are presumed to belong only to a particular race or ethnicity, based on their surname and geographic location, as a proxy for these characteristics of the borrower. The bank further reaffirmed its commitment to fair lending practices. “Rhinebeck Bank is committed to treating its customers fairly and equitably and has delivered on this commitment as evidenced by its Fair Loan Analysis, which shows consistent pricing across the Bank’s entire portfolio of loans offered directly to consumers by the Bank.”
We will continue to monitor NYDFS activity with respect to Dealer Reserve and will post updates here as they occur.