NYDFS Fair Lending Enforcement
Indirect auto loans and dealer markups (where auto dealers can adjust a borrower’s interest rate, in some cases at their discretion, before selling loans to a bank or non-bank financial firm) have long been the focus of consumer finance regulators. The Consumer Financial Protection Bureau (CFPB) issued a bulletin in 2013 describing differences in the amount of markups between protected-class and non-protected-class borrowers as potential violations of fair lending, and levied a series of high-profile enforcement actions with markups of 2013 to 2016. The CFPB’s liability theory has been heavily criticized, and in 2018 by Congress canceled the CFPB Policy Bulletin 2013. The CFPB has not filed a public enforcement action against an indirect auto lender since this bulletin was repealed.
NYDFS picked up where the CFPB left off. In 2018, NYDFS issued its own Guide to indirect car lending and began conducting detailed and data-driven analysis of lenders’ indirect auto loan portfolios through its power to both investigate and investigate financial institutions. These analyzes led directly to enforcement actions. In June 2021, NYDFS entered approval commands with two state-chartered banks in New York, based on allegations that the banks charged protected-class borrowers higher interest rates than protected-class borrowers by imposing surcharges. NYDFS claimed that the markups violated New York’s fair lending law because they were based solely on discretion and not on the borrower’s creditworthiness or other objective criteria. NYDFS asked the banks to pay civil penalties, issue refunds to borrowers and take remedial action.
The October 6 enforcement action follows a similar pattern. NYDFS alleged that the bank failed to effectively monitor auto dealers from whom the bank bought loans and allegedly allowed auto dealers to charge members of protected classes more premiums than borrowers of non-protected classes. The consent order requires the bank to pay a $950,000 civil penalty, make significant changes to its compliance management system, and protected-class borrowers who NYDFS alleges have been charged higher mark-ups, on average, than class-1 borrowers non-protected class to provide a refund.
Each of the three NYDFS enforcement actions was based on the disparate-impact theory of fair lending liability, by which neutral policies or practices can still lead to fair lending violations when the policies or practices produce disproportionate results — which are typically data-driven Analyzes identify lenders’ portfolios – for protected class borrowers. In fact, each of the Consent Orders expressly acknowledges that NYDFS found no evidence of willful discrimination. NYDFS has nonetheless advanced its investigations based on various findings identified in its data analyses. Lenders regulated by NYDFS should be prepared for ongoing review of their fair lending compliance.
Prepare for NYDFS Fair Lending exams and investigations
NYDFS regularly conducts fair credit screening of all banks authorized by New York State and conducts targeted fair credit screening of non-bank lenders. NYDFS has also launched a number of investigations targeting fair lending compliance in recent years, including a wide-ranging review of potential redlining in the mortgage industry. These audits and investigations include a detailed review of fair lending compliance programs and extensive data analysis of loan portfolios.
NYDFS fair credit reviews are uniquely complex compared to other state financial services regulators and, in some cases, involve deeper data analysis than federal regulators. For example, despite joint oversight with federal regulators over the banks that were the subject of the NYDFS’s three most recent enforcement actions, only the NYDFS imposed consent orders based on the banks’ alleged violations of fair lending.
These fair credit reviews and investigations may result in NYDFS requiring corrective action through the confidential oversight process and, in certain circumstances, public enforcement actions such as the three recent Consent Orders relating to indirect auto loans.
DFS is likely to continue its aggressive review of fair lending compliance by institutions, and institutions regulated by NYDFS should consider a thorough review of their fair lending compliance programs. In particular, lenders involved in indirect auto lending should evaluate how they oversee relationships with auto dealers and their controls over markups. Lenders should also consider lending programs that include any form of discretionary pricing. Lenders should also consider conducting statistical analysis of their current loan portfolio and implementing a process for analyzing loan data on a regular basis.