In deciding that discrimination had occurred, the Department followed the procedures used by Consumer Financial Protection Bureau (“CFPB) during its disparate impact assault on dealer rate participation beginning in 2013. Since ECOA prohibits collecting customer race or ethnicity for auto finance customers, the Department applied a highly criticized proxy, the BISG proxy, that attempts to identify minority consumers based on surname and geolocation. In doing so, the Department found that minorities allegedly paid higher rates ranging from 20BP to 59BP over and above what white persons paid.
According to the Department, each bank,” in violation of New York Executive Law § 296-a, instituted discretionary Dealer Markup policies that resulted in disparate impacts that negatively affected members of racial and ethnic minority groups, without any justification.” Note that all dealer participation was found to be at fault, not just dealer participation where different pricing was allegedly found. The Department expressly found no evidence of intent to discriminate.
In announcing the consent decrees, New York Financial Services Superintendent Linda A. Lacewell stated, “The Department is committed to ensuring that all individuals, regardless of race or ethnicity, are treated equally by lenders across New York State. Ensuring access to automobile loans on equitable terms is just one way in which the Department seeks to combat the inequities faced by individuals of color and to achieve economic justice.”
The two state lenders agreed to pay restitution to affected minority consumers (it is unclear which persons or even how many were negatively affected) plus penalties to the Department of $275,000 and $350,000, respectively. One lender exited the auto finance business altogether while the other agreed to eliminate dealer rate participation and compensate dealers solely through flat fees going forward.
These cases are believed to be the first time that a state regulator has settled claims involving dealer rate participation and alleged disparate impact credit discrimination in auto finance. It now appears that dealer rate participation may be considered unlawful in New York if it results in minorities paying higher rates than whites.
Other states, as well as the federal CFPB and Federal Trade Commission (“FTC”) are looking at dealer rate participation for similar disparate impact credit discrimination claims. The issue has garnered the attention of the National Association of Attorneys General.
The Department recognized that a legitimate business reason can justify rate discrepancies. Dealers are strongly advised to adopt the NADA Fair Credit Compliance Policy & Program which provides for a standard rate participation amount and allows for downward deviations from the standard rate only for identified legitimate business purposes. Examples of legitimate business reasons include matching a local credit union’s rates, manufacturer incentive rate buydowns, and where a consumer demonstrates an inability to pay at the higher rate.
The NADA Program is based on disparate impact consent decrees entered into by the federal government and requires that each deal be certified as using either the dealer’s standard rate participation or documenting the legitimate business purpose for a lower rate. Another NADA program applies a similar approach to the sale of voluntary protection products and sets a standard price and then documents a legitimate business reason for selling the products at a lower price. Consumer advocates claim that minorities and other protected classes of persons pay more for voluntary protection products than white persons do.
Expect disparate impact credit discrimination attacks to continue in progressive states and from the CFPB where consumer activism seems to be back in force with leaders appointed by the Biden Administration. The FTC is now composed of three Democrats and two Republicans and may take up this issue as well. Having a deal by deal documentation of charging either the standard established rate participation or documenting the legitimate business reason for charging a lower markup is the best protection a dealer can take to avoid being caught up in the disparate impact crossfire.