After announcing several years ago that it intended to resume with fair application of loans 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 on the basis of the claim that allowing car dealers to negotiate retail prices of installment sales contracts has had a disparate impact on the basis of race and of national origin.
For readers who have followed CFPB’s efforts in this area, the allegations contained in these consent orders will be very familiar. The DFS claimed that the practice of giving dealers “discretion” in setting retail interest rates resulted in statistically significant differences in prices, putting Hispanic and African American consumers at a disadvantage, with differences ranging from 20 at 59 basis points. Consent orders do not specify the analytical method used to arrive at these disparity figures.
But despite the familiar claims, there are a few notable points about these two consent orders. First, they represent the first effort by a state regulator to pursue the issue of dealer finance charges against an assignee of retail payment contracts of which we are aware. Even if the CFPB is reluctant to take up this theory after the Congress disapproval of its newsletter on indirect auto finance, the NYDFS ‘interest in this issue could have a significant impact on auto finance companies subject to the agency’s jurisdiction.
In addition, the prospective relief of one of the consent orders goes well beyond that required in the CFPB consent orders in this regard. One of the target banks left the indirect auto finance business in 2017, but for the other bank that was still in business, the consent order required the bank to adopt a flat-rate pricing model, with no exceptions. This extreme measure seems to us to be equivalent to forcing the bank to withdraw from the indirect automobile activity; There were high-profile examples of auto finance companies adopting fixed fees during the CFPB consent prescription period, and these fixed-fee models, according to industry data, resulted in a dramatic reduction in market shares. these companies’ market, and the fixed cost models were subsequently abandoned.
We will be monitoring more developments from NYDFS on this issue. But if the Ministry intends to force auto finance companies to adopt a flat-rate-only pricing model, it may force companies with larger indirect auto activity to litigate one of these cases because of the overwhelming business implications. adoption of such a model.