WASHINGTON, D.C. — Two weeks after American Banker reported that the Consumer Financial Protection Bureau was planning to cite three captive auto finance companies for allegedly allowing their dealer partners to charge higher interest rates on auto loans to minority buyers, the CFPB and Department of Justice (DOJ) announced that Honda Finance Corporation has agreed to a $24 million settlement.

According to the regulator, 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. The consent order requires Honda to change its pricing and compensation system to substantially reduce dealer discretion and minimize the risks of discrimination, and to 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 today’s action,” said CFPB Director Richard Cordray 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 toward protecting consumers from discrimination.”

However, in a statement posted to its website, Honda Finance officials noted that the captive is not fully in agreement with the regulator's assessment of discrimination in auto lending. The methodology used by the bureau to determine if minorities pay higher rates for auto loans has been questioned by industry associations and lawmakers alike. Last year, a study by Charles River Associates found that the CFPB only accurately identifies a consumer’s race 25% of the time. 

"AHFC 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," Honda Finance's statement read, in part.

According to American Banker, Toyota Motor Credit Corp. and Nissan Motor Acceptance Corp. will also be cited by the bureau this month. The news source referred to a leaked internal memo from the agency, which suggested that the limitation of dealer discretion — a practice in which a dealer marks up the interest rate on a retail installment sales contract as compensation for arranging financing — was one of its goals in the auto lending arena. On Monday, the National Automobile Dealers Association filed a Freedom of Information Act request seeking to make this memo public.

"If true, the statements made by senior CFPB officials in this memo directly contradict repeated statements, including testimony before Congress, from Director Cordray that he is aware and respectful of his Congressional mandate not to regulate dealers," said NADA President Peter Welch in a press release issued by the association. "Consumers benefit tremendously from dealer discounts, so they deserve to know if these discounts are in danger being unjustly and unfairly eliminated by overzealous Washington regulators."

According to the CFPB, Honda allowed dealers to mark-up consumers’ interest rates as much as 2.25% for contracts with terms of five years or less, and 2% for contracts with longer terms. The regulator claims that these practices resulted in violations of the Equal Credit Opportunity Act, with thousands of minority borrowers from January 2011 through July 14, 2015, paying, on average, between $150 to more than $250 more for their auto loans. The captive, according to the settlement, will cap dealer markups at 1.25% above the buy rate for auto loans with terms of 5 years or less, and 1% for auto loans with longer terms.

In a statement released today, the NADA underscored its concern that actions like the one against Honda could harm consumers in the long run. "Today’s government-imposed order will hamstring the ability of thousands of consumers to negotiate lower interest rates with their local auto dealership," said NADA Chairman Bill Fox. "This enforcement action artificially constrains the right of consumers to benefit from interest rate reductions of up to 1% of the APR on their next auto loan.”

The bureau also noted in its press release that it did not assess penalties against Honda because of Honda’s responsible conduct, “namely the proactive steps the company is taking that directly address the fair lending risk of discretionary pricing and compensation systems by substantially reducing or eliminating that discretion altogether.” 

Honda will be required to contact consumers affected by its dealer participation policy and distribute funds, as well as make reports to the bureau regarding this compensation activity.

“We believe that Honda’s new compensation system balances fair compensation for dealers and fair lending for consumers,” said the head of DOJ’s Civil Rights Division, Principal Deputy Assistant Attorney General Vanita Gupta, in the CFPB’s press release. “We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing.” 

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