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Honda to pay $24M for discriminatory auto loans

By Special to the Trice Edney News Wire from Target Market News
On August 10, 2015

After an investigation, Consumer Finance Protection Bureau found Honda charged minorities
higher loan rates inconsistent with credit scores.

(TriceEdneyWire.com) – The Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) resolved an action with American Honda Finance Corporation that will put new measures in place to address discretionary auto loan pricing and compensation practices. Honda’s past practices resulted in thousands of African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates than White borrowers for their auto loans, without regard to their creditworthiness.

As part of the order, Honda will change its pricing and compensation system to substantially reduce dealer discretion and minimize the risks of discrimination, and will pay $24 million in restitution to affected borrowers.

“The CFPB is committed to creating a fair marketplace for all consumers, and other auto lenders should take note of [this] action,” said CFPB Director Richard Cordray. “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.”

“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,” said the head of DOJ’s Civil Rights Division, Principal Deputy Assistant Attorney General Vanita Gupta. “We recognize that dealerships perform a valuable service in connecting customers with lenders and that they should be fairly compensated for that service … We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing.”

Auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans. When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third-party lender like Honda. Honda is wholly-owned by American Honda Motor Co., Inc. It is one of the largest indirect auto lenders in the United States.

As an indirect auto lender, Honda sets a risk-based interest rate, or “buy rate,” that it conveys to auto dealers. Honda then allows 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. Honda permitted dealers to mark-up consumers’ interest rates as much as 2.25 percent for contracts with terms of five years or less, and 2 percent for contracts with longer terms.

The enforcement action is the result of a joint CFPB and DOJ investigation that began in April 2013. The agencies investigated Honda’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 Honda’s policies:

  •  Resulted in minority borrowers paying higher dealer markups: Honda violated the Equal Credit Opportunity Act by charging African-American, Hispanic, and Asian and Pacific Islander borrowers higher dealer markups for their auto loans than non-Hispanic white borrowers. These markups were without regard to the creditworthiness of the borrowers.
  •  Injured thousands of minority borrowers: Honda’s discriminatory pricing and compensation structure meant thousands of minority borrowers from January 2011 through July 14, 2015 paid, on average, from $150 to over $250 more for their auto loans.

The measures provided in the orders will help ensure that discrimination does not increase the cost of auto loans for consumers on the basis of race and national origin. Under the CFPB order, Honda must:

  •  Substantially reduce or eliminate entirely dealer discretion
  •  Pay $24 million in damages for consumer harm
  •  Administer and distribute funds to victims

This latest action, said federal officials, is part of a larger joint effort between the CFPB and DOJ to address discrimination in the indirect auto lending market. In December 2013, the CFPB and DOJ took an action against Ally Financial Inc. and Ally Bank that ordered Ally to pay $80 million in consumer restitution and an $18 million civil penalty.

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