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Under the Equal Credit Opportunity Act, creditors are prohibited from discriminating against loan applicants based on race or national origin. But that was a rule Honda’s financing unit allegedly violated, resulting in thousands of African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates than white borrowers for their auto loans. Now, as part of a settlement with federal regulators to resolve allegations that the company allowed discriminatory loan pricing, the company must provide $24 million in restitution to borrowers.
The Consumer Financial Protection Bureau, along with the Department of Justice, announced today that a two-years-long investigation into American Honda Finance Corporations’ discretionary auto loan pricing and compensation practices found the company allowed dealers to unfairly discriminate against certain consumers.
According to the CFPB complaint [PDF], as an indirect auto lender, Honda sets a risk-based interest rate – otherwise known as a buy rate – for its auto dealers. The company then allows these dealers to charge a higher interest rate when finalizing a deal – this is generally referred to as a dealer markup.
This is where the issue comes into play, the CFPB says, because Honda allowed dealers to mark up consumers’ interest rates without regard to creditworthiness as much as 2.25% for contracts with terms of five years or less, and 2% for contracts with lower terms.
The CFPB and DOJ’s investigation found that Honda’s policies were in violation of the Equal Credit Opportunity Act, and resulted in thousands of minority borrowers from January 2011 through July 14, 2015 paying, on average, $150 to over $250 more for their auto loans.
“The agencies claim that Honda charged borrowers higher interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk,” the DOJ says in a statement.
In all, investigators found that compared to non-Hispanic white car buyers, average African-American victims were obligated to pay over $250 more during the term of the loan because of discrimination, while the average Hispanic victim was obligated to pay over $200 more during the term of the loan and the average Asian/Pacific Islander victim was obligated to pay over $150 more during the term of the loan.
As part of the proposed consent order resolving the discriminatory pricing allegations, Honda has agreed to change the way it prices its loans by limiting dealer markup to 1.25% for loans of 60 months or less, and to 1% for loans greater than 60 months.
Honda must also improve its monitoring and compliance systems. The settlement allows the lender to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results.
With regard to the $24 million in restitution for consumers, an administrator will be appointed to locate victims and distribute payments.
The department and the CFPB will make a public announcement and post information on their websites once more details about the compensation process become available. Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time.
Today’s action against Honda is part of a larger joint effort between the CFPB and DOJ to identify and address discrimination in the direct auto lending market. Two years ago, the agencies took action against Ally Financial and Ally Bank for similar violations. In that case, the company was ordered to pay $80 million in restitution and a $18 million civil penalty.
CFPB and DOJ Reach Resolution with Honda to Address Discriminatory Auto Loan Pricing [CFPB]
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