Toyota Motor Credit Corp. will change its pricing and compensation system to reduce dealer discretion and financial incentives to mark up interest rates, under an enforcement action by the Consumer Financial Protection Bureau and Department of Justice.
As part of the order, Toyota Motor Credit is required to pay up to $21.9 million in restitution to thousands of African-American and Asian and Pacific Islander borrowers who paid higher interest rates than white borrowers for their auto loans, without regard to their creditworthiness.
An investigation didn't find that Toyota Motor Credit intentionally discriminated against customers, but that its discretionary pricing and compensation policies resulted in discriminatory outcomes.
As an indirect auto lender, Toyota Motor Credit sets interest rates, or “buy rates,” for consumers based on credit scores and other risk criteria. Those rates are conveyed to auto dealers. Indirect auto lenders like Toyota Motor Credit then allow auto dealers to charge a higher interest rate when they finalize the deal with the consumer. This is typically called “dealer markup.” Markups can generate compensation for dealers while giving them the discretion to charge consumers different rates regardless of consumer creditworthiness. Over the time period under review, Toyota Motor Credit permitted dealers to mark up consumers’ interest rates as much as 2.5%.
The enforcement action is the result of a joint CFPB and DOJ investigation that began in April 2013. The agencies investigated Toyota Motor Credit’s indirect auto lending activities’ compliance with the Equal Credit Opportunity Act, which prohibits creditors from discriminating against loan applicants in credit transactions on the basis of characteristics such as race and national origin. The investigation concluded that Toyota Motor Credit’s policies:
- Resulted in minority borrowers paying higher dealer markups: Toyota Motor Credit violated the Equal Credit Opportunity Act by adopting policies that resulted in African-American and Asian and Pacific Islander borrowers paying higher interest rates for their auto loans than non-Hispanic white borrowers as a result of the dealer markups that Toyota Motor Credit permitted and incentivized. These markups were without regard to the creditworthiness of the borrowers. f
- Affected thousands of minority borrowers: Toyota Motor Credit’s pricing and compensation structure meant that for the period covered in the order, thousands of African-American borrowers were charged, on average, over $200 more for their auto loans, and thousands of Asian and Pacific Islander borrowers were charged, on average, over $100 more for their auto loans.
"No consumer should be forced to pay more money for a loan because of their race or national origin," said U.S. Attorney Eileen M. Decker of the Central District of California. "This settlement resolves our claims by providing compensation for affected consumers and seeking to ensure that future loans funded by Toyota reflect equal terms.”
Under the CFPB order, Toyota Motor Credit must:
- Reduce the amount by which loans can be marked up: Toyota Motor Credit will reduce dealer discretion to mark up the interest rate to only 1.25% above the buy rate for auto loans with terms of 5 years or less, and 1% for auto loans with longer terms. Toyota Motor Credit also has the option under the order to move to non-discretionary dealer compensation. The CFPB didn’t assess penalties against Toyota Motor Credit because of the proactive steps the company is taking that directly address fair lending risk by substantially reducing or eliminating discretionary pricing and compensation systems. Toyota Motor Credit has further committed that it will not fund any additional nondiscretionary component of dealer compensation by increasing its posted risk-based buy rates.
- Pay up to $21.9 million in remediation to affected consumers: Toyota Motor Credit will pay $19.9 million into a settlement fund that will go to affected African-American and Asian and Pacific Islander borrowers whose auto loans were financed by Toyota Motor Credit between January 2011 and Feb. 2, 2016. In addition, Toyota Motor Credit will pay up to an additional $2 million into the fund to compensate any affected African-American and Asian and Pacific Islander borrowers in the time period between Feb. 2 and when Toyota Motor Credit implements its new pricing and compensation structure.
- Pay to hire a settlement administrator to distribute funds to affected consumers: A settlement administrator will contact consumers, distribute the funds, and ensure that borrowers who were affected receive compensation. The CFPB will provide contact information for the settlement administrator once that entity is chosen to address questions that consumers may have about potential payments.
Auto loans are the third-largest source of outstanding household debt in the U.S., after mortgages and student loans. When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third-party auto lender like Toyota Motor Credit. Toyota Motor Credit Corp. is the U.S. financing arm of Toyota Financial Services, which is a subsidiary of Toyota Motor Corp. Toyota Motor Credit is the largest captive auto lender in the U.S. and the fifth-largest auto lender overall.