After announcing many years ago that it intended to resume with a fair application of lending 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 based on the allegation that allowing auto dealers to negotiate retail installment contract prices had a disparate impact on the basis of race and national origin.

For readers who have followed the CFPB’s efforts in this area, the allegations contained in these consent orders will be very familiar. The DFS claimed that the practice of leaving “discretion” to dealers in setting retail interest rates resulted in statistically significant price differences, disadvantaging Hispanic and African American consumers, with differences ranging from 20 to 59 basis points. The consent orders do not specify the method of analysis 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 prosecute the issue of dealer finance charges against an assignee of retail installment contracts of which we are aware. Even if the CFPB hesitates to take up this theory after the Congressional disapproval of its bulletin on indirect auto finance, NYDFS’ interest in this issue could have a significant impact on auto finance companies subject to the agency’s jurisdiction.

Further, the prospective waiver in one of the consent orders goes well beyond what is required in the CFPB consent orders on this matter. One of the target banks had exited 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 ousting the bank from the indirect automotive business; there were well-known examples of auto finance companies adopting flat fees during the period of the CFPB consent orders, and these flat fee models, according to industry data, resulted in a dramatic reduction in market share of these companies, and the flat fee models were later abandoned.

We will be watching further developments from NYDFS on this issue. But if the Department intends to force auto finance companies to adopt a flat-rate-only pricing model, it could force companies with more indirect auto business to sue in one of these cases by because of the overwhelming business implications of adopting such a model.