Rhinebeck Bank will pay out at least $950K in N.Y. car dealer interest discrimination settlement

Rhinebeck Bank has agreed to pay a $950,000 penalty and restitution to settle allegations its partner auto dealerships discriminated against minority borrowers in New York state.

The Oct. 5 consent order announced Thursday by the New York Department of Financial Services also requires the Poughkeepsie, N.Y.-based lender to continue to cap the profit margins it lets dealerships add to the interest rates of the indirect auto loans stores arrange and send to the bank.

“Today’s settlement with Rhinebeck Bank demonstrates the Department’s commitment to ensuring access to financial services, on equitable terms, for all consumers across New York State,” New York Financial Services Superintendent Adrienne Harris said in a statement. “DFS continues working to ensure that New Yorkers have transparent and fair access to financial products, combatting the historical inequities faced by individuals of color today.”

Rhinebeck said in a news release Thursday it disagreed with the department’s conclusions and denied the accusations but settled to avoid “a lengthy and costly legal challenge.”

Since Dec. 15, 2020, Rhinebeck has allowed dealerships to discretionarily add up to 2 percentage points of dealer reserve to the “buy rate” — the minimum annual percentage rate at which the bank would buy a loan based on a borrower’s creditworthiness. It capped this interest rate margin at 1.5 points for loans between 73-84 months and at 2 points for loans up to 72 months. Between Jan. 1, 2017, and Dec. 15, 2020, the bank capped dealer margin at between 1.5-2.5 percentage points, depending on term length, though it let “a small number” of dealers add a reserve of up to 3 points.

The consent order said the Department of Financial Services analyzed Rhinebeck’s loan portfolio and found Rhinebeck’s Hispanic borrowers on average experienced an extra 0.21 to 0.33 percentage points on their interest rates than whites between 2017 and 2021.

Blacks paid an extra 0.31 to 0.39 points of margin than whites between Jan. 1, 2017,and Aug. 31, 2020, the agency said. Asians were charged 0.15 points more than whites between Oct. 1, 2018, and Aug. 31, 2020, it said.

The agency said the differences were statistically significant and didn’t reflect borrower creditworthiness.

“Although the Department did not find evidence of any intentional discrimination on the part of the Bank or its employees, the Bank’s specific policies and practices allowed automobile dealers to markup a consumer’s interest rate above the Bank’s established Buy Rate, which resulted in a disparate impact on the basis of race and national origin,” the consent order states.

Rhinebeck didn’t monitor dealerships for disparities until 2020, according to the Department of Financial Services.

The department said Rhinebeck violated New York’s credit antidiscrimination law by giving dealerships the discretion to set reserve and produce such a “disparate impact.”

“This settlement reflects a striking departure by DFS from the current approach of virtually every federal and state banking regulator and enforcement agency on fair lending cases involving dealer reserve,” Rhinebeck CEO Michael Quinn said in a statement. “Dealers, not banks, determine how much markup to charge customers.”

New York state didn’t force the bank to move all dealerships to a flat fee, as it did in a 2021 consent order with lender Chemung Canal to resolve similar accusations.

Instead, Rhinebeck must limit dealers’ capability to set interest rate margin to within the same 1.5- to 2-point caps it established in 2020. However, it also must create a “dealer escalation program” that contains the penalty of a flat-fee model for retailers who discriminate.

Rhinebeck further pledged to monitor its portfolio at least quarterly and make restitution to any additional borrowers experiencing such a disparity.

The bank for the next three years must sign an affidavit confirming its compliance with these terms and detailing any restitution paid.

The loans bought by Rhinebeck lacked information about the race or origin of the borrowers. The Department of Financial Services determined probable ethnicity by comparing a borrower’s last name and location to the races of people fitting that combination within Census data. This proxy methodology, known as “Bayesian Improved Surname Geocoding,”” has been criticized as imprecise, but the New York consent order calls it accepted by researchers and is “known for being more accurate than other statistical methods” to extrapolate ethnicity.

“Banks do not know the racial or ethnic characteristics of borrowers before a loan is originated,” Quinn said in a statement Thursday. “In fact, banks are prohibited by law from ever asking for that information, which means the DFS action is based on allegations where the affected customers are only presumed to be members of a particular race or ethnicity.”

The National Automobile Dealers Association, National Association of Minority Automobile Dealers and American International Automobile Dealers Association in 2014 offered dealerships a strategy to avoid disparate impact allegations: Pick a standard retail margin and stick to it. Deviate downward only in certain situations, such as price-matching a competitor’s rate, and document the reason for the change.

The groups followed that Fair Credit Compliance Policy & Program guidance with a similar 2019 Model Dealership Voluntary Protection Products Policy template for dealers to set consistent margins on finance-and-insurance products to avoid allegations of discrimination with that pricing. Based on recent actions by the Federal Trade Commission and Massachusetts Attorney General’s Office against dealerships, the latter also is on regulators’ radar.

Quinn said Rhinebeck’s direct consumer loans showed consistent pricing, and the bank was committed to “fair and equal access to credit.”