ALBANY — Two banks have settled a state probe of higher interest rates charged to minority auto buyers by auto dealerships that had partnered with the banks.
Saratoga Springs-based Adirondack Trust Company will pay a $275,000 penalty to the state and donate $50,000 to community development organizations focusing on underserved groups.
Elmira-based Chemung Canal Trust Company will pay the state $375,000.
Both banks will have to undertake an effort to find the non-white auto buyers who were charged higher interest rates on average than white buyers and must make restitution for the higher amount of interest charged. Adirondack estimated this would cost it about $55,000.
The state Department of Financial Services announced the settlement Tuesday.
Auto buyers who can’t pay cash can obtain direct financing — arranging the financing themselves directly with a bank, credit union or other lender — or indirect financing, arranged on their behalf by the auto dealer with a lender.
The investigation and the settlement are based on indirect auto lending by the two banks. The dealers they partnered with collected the relevant information from the prospective buyer and the bank sent back a minimum interest rate, or buy rate, at which it would underwrite a loan.
The dealer would then charge a higher rate to the borrower. The difference between the bank’s buy rate and the rate charged to the buyer is called the dealer markup and is the basis for the dealer’s compensation.
The buyer’s race and ethnicity may be obvious to the finance officer sitting with them at the dealership but these details are not recorded in the loan application details forwarded to the bank.
The DFS found that the dealer markup in Adirondack loans from Jan. 1, 2016, to Oct. 31, 2017, was 0.59 percentage points higher for Black borrowers than for white borrowers, 0.46 points higher for Hispanic borrowers and 0.30 points for Asian borrowers.
It said the dealer markup was 0.20 to 0.27 points higher for Chemung’s Hispanic borrowers than for white borrowers from 2016 through 2020.
It said the differences were not based on the creditworthiness of the respective borrowers or any other objective criteria.
DFS used a complex proxy model that factors in a borrower’s address and surname to assign a probable race to borrowers in the time frame involved in the probe.
In a statement Tuesday, Adirondack said: “We are pleased to resolve this matter. We abhor and condemn discrimination on the basis of race, sex or gender identity, creed, sexual orientation, disability, nationality, marital or familial status, age, and military status. We are committed to providing equal access to financial services for all of our customers and communities.”
Chemung said:
“While we are extremely disappointed with the results of the findings, we are pleased to resolve these matters and to put the issues behind us. The circumstances that led to this are completely unacceptable and not representative of Chemung Canal Trust Company’s long and dedicated commitment to its communities.”
DFS noted that the banks themselves do not know the race of their borrowers. It said it found no evidence of intentional discrimination by either bank or its employees but the result nonetheless was discriminatory, and ran counter to New York’s Fair Lending Law and the federal Equal Credit Opportunity Act.
DFS also found that Adirondack Bank failed to maintain adequate controls for reviewing and uncovering discrimination.
DFS noted that both banks cooperated in substantial and timely fashion with the investigation. It said both banks have “demonstrated a continuing interest and commitment to addressing systemic racism in the communities” they serve.
Adirondack voluntarily ended its indirect auto lending program on Nov. 1, 2017.
Chemung agreed to take steps to ensure its indirect lending program is in compliance with state and federal fair lending laws.
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Something very wrong with this reporting.
It’s reported that the banks themselves did not know the race of the potential lenders, only the dealerships knew that.
Yet, the banks are penalized, and the dealerships who actually did the discrimination go unnamed?