Investigations into American Honda Finance Corporation’s lending practices by the Justice Department and the Consumer Financial Protection Bureau found that the lender discriminated against qualified black, Hispanic and Asian borrowers by charging them more in dealer markups than qualified white borrowers.
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“Discrimination of any kind is intolerable”, said Eileen Decker, the U.S. Attorney for the Central District of California, where the Honda lending unit is based. It says that Honda Finance’s past practices resulted in thousands of borrowers of color paying higher interest rates than white borrowers.
“We firmly believe that our lending practices have been fair and transparent”, Honda said in a statement Tuesday.
To settle the lawsuit, Honda agreed to limit the size of dealer markups and to provide $24 million in compensation to past victims of lender discrimination.
“The auto dealers will not be happy”, he said.
“The CFPB is committed to creating a fair marketplace for all consumers, and other auto lenders should take note of today’s action”, said CFPB Director Richard Cordray. The company also has the option of transitioning to a compensation system that removes dealer discretion altogether. “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”.
Auto loans are the third-largest source of household debt in the United States, after mortgages and student loans. Honda dealers had been able to raise interest rates at their discretion and were able to get bigger payments from Honda for charging more, the Justice Department said. Persuading a customer to sign a loan with an inflated “dealer markup” rate is not itself illegal, however the CFPB claims minorities are disproportionately targeted by such schemes.
At issue: what’s referred to as “dealer markup or “dealer interest””. These markups were without regard to the creditworthiness of the borrowers.
The agreement between the Obama administration and Honda also calls for the company to pay $1 million to help finance an auto financing education program that will be operated by the Justice Department.
To hear dealers tell it, CFPB’s action will increase the price consumers pay.
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Through American Honda Motor Co., the auto manufacturer will contact consumers, distribute the restitution funds, and ensure that affected borrowers receive compensation, the consumer bureau said.
