Financial Services Superintendent Maria T. Vullo today announced that the Department of Financial Services (DFS) has issued guidance to remind supervised institutions and sales finance companies that engage in indirect automobile lending through third parties that they must comply with New York State’s Fair Lending Law, despite federal supervisory lapses and rollbacks in enforcement.  New York’s Fair Lending Law prohibits discrimination in, among other things, the granting, withholding, extending, or renewing, or in the fixing of the rates, terms, or conditions of any form of credit on the basis of race, creed, color, national origin, sexual orientation, military status, age, sex, marital status, disability, or familial status. DFS’s guidance also reminds lenders of their liability for any discrimination that may result from markup and compensation policies with third parties such as car dealers.

“As the federal government stands down on protecting consumers from financial frauds and abuses, DFS stands up to safeguard New Yorkers from unfair lending practices,” said Superintendent Vullo. “DFS continues to move ahead in conducting fair lending examinations to review indirect automobile lending programs where appropriate and taking any other supervisory or enforcement actions necessary to ensure that lending in New York State is fair and nondiscriminatory.”

The updated guidance issued by DFS today consolidates, streamlines and reinforces previous guidance issued by DFS’s predecessor, the New York State Banking Department, regarding the fair lending plan requirement, fair lending plan guidelines, and indirect automobile lending by financial institutions and sales finance companies.

Under the guidance issued today, DFS reminded supervised institutions of actions they should take to develop a fair lending compliance program for indirect automobile lending, including the following:

1. The lender’s board of directors and senior management are responsible for developing a fair lending plan and ensuring that the lender’s practices comply with the plan’s provisions.
2. A fair lending compliance program should monitor implementation of the fair lending plan and adherence to the plan’s policies and procedures by the lender.  Monitoring should, on an on-going basis, address both the lender’s application and underwriting processes and its pricing policies.
3. The fair lending plan should include a training program for both new hires and current employees, including management and other key personnel.

DFS also reminded supervised institutions of their liability for any discrimination resulting from markup and compensation policies.  It has come to DFS’s attention that many lenders permit auto dealers to add to the buy rate a “dealer markup” or “dealer overage.”  Dealer markup is an additional source of compensation for dealers.  The lender may also receive a portion of the dealer markup.  Lenders that permit dealers to mark up the buy rate and establish policies governing the amount and availability of dealer markup are potentially liable for pricing disparities on a prohibited basis.  The dealer is paid, in whole or in part, the difference between the buy rate and the higher interest rate ultimately charged to the consumer.

Because dealer markup is part of the credit transaction, it must be charged without discrimination to comply with New York’s Fair Lending Law.

DFS advised lenders to take the following compliance actions to address these risks:

1. Learn about a dealer and its business practices before entering into a third-party loan origination agreement.  The lender should periodically evaluate its relationship with a dealer to determine whether practices need to be revised or the relationship terminated, and make provisions for such evaluations in the lender’s compliance procedures.
2. Review any policies or procedures a dealer uses when arranging financing for customers and advise the dealer of any areas of weakness or concern.
3. Regularly assess its and a dealer’s product marketing and advertising strategies to ensure those strategies comply with the principles and provisions of fair lending laws and the fair lending plan.
4. Consider reducing dealer discretion by placing limits on dealer markup, or eliminating dealer discretion to markup interest rates by using a different method of dealer compensation, such as a flat fee for each transaction, that does not potentially result in discrimination.  Limits on markup do not, however, guarantee protection from fair lending liability.
5. Monitor both its whole portfolio and specific dealers for compliance with fair lending policies and procedures.
6. The lender should take prompt corrective action if it finds any differences in interest rates that are unexplained by objective credit factors, such as restricting or eliminating a dealer’s ability to mark up, terminating the lender’s relationship with a dealer, and providing restitution to affected consumers.

Consumers who believe that they may be been discriminated against should contact DFS at (800) 342-3736 or at www.dfs.ny.gov to file a complaint or to speak with a consumer assistance representative.

A copy of the guidance can be found here.

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