NYDFS Continues Series of Fair Lending Enforcement Actions against New York State-Chartered Banks | Pillsbury Winthrop Shaw Pittman LLP

NYDFS Fair Lending Enforcement
Indirect auto lending and dealer “markups” (in which auto dealers may adjust a borrower’s interest rate, in some cases in dealers’ own discretion, before selling loans to a bank or non-bank finance company) have long been a focus of consumer finance regulators. The Consumer Financial Protection Bureau (CFPB) issued a bulletin in 2013 describing disparities in the amount of markups between protected class and non-protected class borrowers as potential fair lending violations, and brought a series of high-profile enforcement actions involving markups from 2013 to 2016. The CFPB’s theory of liability was heavily criticized, and in 2018 Congress repealed the CFPB’s 2013 policy bulletin. The CFPB has not brought a public enforcement action against an indirect auto lender since the repeal of that bulletin.

NYDFS picked up where the CFPB left off. In 2018, NYDFS issued its own guidance on indirect auto lending and began conducting detailed and data-driven analyses of lenders’ indirect auto loan portfolios through its authority to both examine and investigate financial institutions. Those analyses led directly to enforcement actions. In June 2021, NYDFS entered into Consent Orders with two New York state-chartered banks based on allegations that the banks charged protected class borrowers higher interest rates than protected class borrowers through the imposition of markups. NYDFS alleged that the markups violated New York’s fair lending law because they were based solely on discretion, not a borrower’s creditworthiness or other objective criteria. NYDFS required the banks to pay civil penalties, make restitution to borrowers, and implement remedial measures.

The October 6 enforcement action follows a similar pattern. NYDFS alleged that the bank failed to effectively monitor auto dealers from which the bank purchased loans, and allegedly permitted auto dealers to charge members of protected classes more in markups than non-protected class borrowers. The Consent Order requires the bank to pay a $950,000 civil penalty, implement significant changes to its compliance management system, and provide restitution to protected class borrowers who NYDFS alleged were, on average, charged higher markups than non-protected class borrowers.

Each of the three NYDFS enforcement actions were based on the disparate impact theory of fair lending liability, through which facially neutral policies or practices may nevertheless lead to fair lending violations if the policies or practices result in disproportionate outcomes—typically identified through data-driven analyses of lender’s portfolios—for protected class borrowers. Indeed, each of the Consent Orders explicitly acknowledges that NYDFS did not find any evidence of intentional discrimination. NYDFS nevertheless pressed forward with its investigations based on disparate outcomes identified in its data analyses. Lenders regulated by NYDFS should be prepared for continued scrutiny of their fair lending compliance.

Preparing for NYDFS Fair Lending Examinations and Investigations
NYDFS conducts regular fair lending examinations of all New York state-chartered banks and conducts targeted fair lending examinations of non-bank lenders. NYDFS has also initiated a series of investigations in recent years targeting fair lending compliance, including a wide-ranging review of potential redlining in the mortgage industry. These examinations and investigations include a detailed review of fair lending compliance programs and comprehensive data analyses of loan portfolios.

NYDFS’s fair lending examinations are uniquely complex as compared to other state financial services regulators, and in some cases include deeper data analyses than federal regulators. For example, despite sharing supervision with federal regulators of the banks that were the subjects of the three recent NYDFS enforcement actions, only NYDFS imposed Consent Orders based on the banks’ alleged fair lending violations.

These fair lending examinations and investigations can result in NYDFS requiring corrective action through the confidential supervisory process and, in certain circumstances, public enforcement actions such as the three recent Consent Orders relating to indirect auto lending.

DFS will likely continue its aggressive review of institutions’ fair lending compliance, and institutions regulated by NYDFS should consider conducting a thorough review of their fair lending compliance programs. In particular, lenders involved in indirect auto lending should assess how they monitor auto dealer relationships and their controls relating to markups. Lenders should also evaluate loan programs that involve any form of discretionary pricing. Lenders should also consider conducting statistical analyses of their current loan portfolios, as well as implementing a process to analyze loan data on a regular basis.