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Honda, Toyota and Nissan's financing arms are poised to agree to limit discretionary pricing for dealers after regulators accused them of allowing partners to mark up loans at higher rates to minorities, according to confidential documents.
June 30 -
Despite some silver lining, analysts say the Supreme Court decision upholding "disparate impact" in fair-lending disputes will only embolden activists and regulators to bring more cases.
June 25 -
The Justice Department and the Consumer Financial Protection Bureau are alleging that Toyota Motor Credit engaged in practices that resulted in discriminatory pricing of loans, according to a securities filing by the company.
December 1
WASHINGTON — American Honda Finance Corp. reached a $24 million settlement with authorities Tuesday on charges that its partnering car dealers issued loans with disproportionately higher interest rates to minorities.
The proposed settlements Honda reached with the Consumer Financial Protection Bureau and the Department of Justice are unusual in that they compel Honda to lower a cap imposed on dealers for pricing loans. The CFPB has urged other lenders to do so voluntarily to lower the risk of discriminatory pricing, but Honda's financing arm is the first to agree to such a move as part of an enforcement action.
American Honda has also agreed to refund $24 million to affected borrowers. However, as a result of agreeing to the pricing change, the company will not pay a civil money penalty. The settlement is yet another move by the CFPB to reduce cases of "disparate impact," where minorities disproportionately pay more for loans even when lenders did not intend to discriminate.
"The CFPB is committed to creating a fair marketplace for all consumers, and other auto lenders should take note of today's action," CFPB Director Richard Cordray said in a press release. "Honda's proactive decision to move to a new pricing and compensation system demonstrates industry leadership and represents a significant step towards protecting consumers from discrimination."
Specifically, authorities alleged American Honda afforded their partnering dealers too much pricing discretion. That, according to CFPB and DOJ, led to higher loan rates for thousands of African American, Hispanic and Asian and Pacific Islander borrowers when compared with rates for white borrowers, regardless of their credit profile and risk.
The CFPB said minority borrowers with a Honda loan paid an average of $150 to $250 more since January 2011. Honda previously had allowed dealers to use what the CFPB calls "markups" to raise interest rates by as much as 2.25% on loans of five years or less, and 2% for longer terms, which is within the typical range for many major auto finance companies. The markups, which the industry calls dealer reserves, are designed to compensate the dealers and give them price discretion to cover risks that may not be solely based on the borrower's credit score.
But under the settlement, Honda will lower those caps to 1.25% for loans of five years or less, and to 1% for longer loans.
In a company-issued statement, Honda said it disagreed with the basis regulators used to determine that Honda borrowers were victims of disparate impact. However, the company said it would announce the adjusted cap to dealers later this year.
American Honda "has a difference of opinion with the CFPB and the DOJ regarding the methodology used to make determinations about lending practices, but we nonetheless share a fundamental agreement in the importance of fair lending," the company said in an emailed statement. "In cooperation with the CFPB and the DOJ, AHFC will be working closely with our Honda and Acura dealers in proactively adjusting our pricing programs to continue to give our customers the ability to choose the loan that is best for supporting their purchase of Honda and Acura products."
The CFPB filed its order as an administrative action so it will be handled through an internal judicial process. The DOJ's proposed order was filed in the U.S. District Court for the Central District of California.
"We commend Honda for its leadership in agreeing to impose lower caps on discretionary markups and for its commitment to treating all of its customers fairly without regard to race or national origin," Principal Deputy Assistant Attorney General Vanita Gupta, head of the DOJ's Civil Rights Division, said in a press release. "We recognize that dealerships perform a valuable service in connecting customers with lenders and that they should be fairly compensated for that service. We believe that Honda's new compensation system balances fair compensation for dealers and fair lending for consumers. We hope that Honda's leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing."
Last month American Banker reported that the CFPB was seeking settlements with American Honda, Toyota Motor Credit Corp. and Nissan Motor Acceptance related to allegations of disparate impact, with terms of the deals possibly including adjusted pricing caps. At the time, the Honda settlement was the only one of the three with a projected date for the parties to reach an agreement.
Since then, both Toyota and Nissan have reportedly said they remain in ongoing discussions with regulators. Toyota has said it does not have current plans to change its dealer pricing model, according to reports.
Meanwhile, representatives of the car dealership industry blasted the Honda settlement Tuesday. They have argued that the pricing caps actually give dealers more flexibility to lower consumer interest rates.
"Today's government-imposed order will hamstring the ability of thousands of consumers to negotiate lower interest rates with their local auto dealership," Bill Fox, chairman of the National Automobile Dealers Association, said in a press release.
