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From Banking and Finance Law Daily, July 14, 2015

Honda finance arm agrees to settle equal credit charges

By Richard A. Roth, J.D.

American Honda Finance Corporation, the car manufacturer’s consumer auto loan subsidiary, has agreed to settle equal credit charges levied by the Consumer Financial Protection Bureau and the Justice Department. According to the Justice Department, the finance company, acting as an indirect lender, failed to monitor the activities of dealers from which it bought loans to prevent discriminatory interest rate mark-ups. As a result, African-American, Hispanic, and Asian and Pacific Islander borrowers were charged higher interest rates on their car loans. According to the CFPB, the higher rates cost minority consumers an average of between $150 and $250 over the life of a loan.

Indirect lending. When buying loans not subsidized by the manufacturer, Honda engaged in a practice common among indirect lenders, the agencies said, setting a risk-based “buy rate” on each loan and then allowing the dealer to charge a higher rate to increase its profit. Dealers could mark up shorter-term loans as much as 2.5 percent, with a 2-percent mark-up being allowed for loans with terms of longer than five years. Dealers marked up loans to minority borrowers to a greater extent than loans to white borrowers, the agencies alleged, resulting in higher interest rates that were not related to borrowers’ credit-worthiness.

Discrimination charges. The Justice Department’s complaint alleged specifically that Honda knew or should have known that its policy of allowing dealer mark-ups presented a substantial risk of discrimination but did not monitor the dealers’ activities for discrimination. For example, dealers were not required to explain the different mark-ups to Honda. Honda did not provide fair lending training to the dealers, the Justice Department added.

During the period the agencies looked at, when compared to similarly situated white borrowers:

  • African-American borrowers paid an average of 36 basis points more in mark-up;

  • Hispanic borrowers paid an average of 28 basis points more; and

  • Asian/Pacific Islander borrowers paid an average of 25 basis points more.

To settle the charges, Honda has agreed to pay $24 million in consumer redress. It also will change its loan purchasing practices by halving the permissible dealer mark-ups. Alternatively, the company may choose to implement a different form of dealer compensation that would not allow discrimination, such as setting a fixed mark-up or prohibiting mark-ups.

The CFPB filed its consent order in an administrative enforcement action. The Justice Department filed a complaint in federal court, meaning that consent order will need judicial approval.

Previous enforcement actions. This is not the first equal credit enforcement action the agencies have undertaken. In March 2013, the CFPB warned indirect auto lenders that it would hold them responsible for failing to monitor dealers’ mark-ups (CFPB Bulletin 2013-02). Nine months later, Ally Financial and Ally Bank agreed to settle equal credit charges brought by the Justice Department and the bureau. That settlement cost the lenders nearly $100 million, including an $18 million civil penalty. The CFPB said that Honda is not paying a civil money penalty because of its efforts to resolve the violations responsibly, in particular by changing its practices to avoid future violations.

MainStory: TopStory CFPB ConsumerCredit EnforcementActions EqualCreditOpportunity

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