Last week, the Consumer Financial Protection Bureau announced a $24 million settlement with Honda Motor Company. The CFPB alleges that Honda engaged in discriminatory auto lending that adversely affected thousands of consumers by charging them an unfairly high interest rates. Honda denies any wrongdoing, but has agreed to change its policies. The consent order can be found here.
The CFPB began investigating Honda, the fourth largest auto lender in the country, in early 2013. It looked into loans during a two year period from January 2011 to December 2013. The CFPB found that Honda, like most lenders, set a risk-based interest rate, or “buy rate,” that it conveyed to individual auto dealers, and then allowed auto dealers to charge a higher interest rate when they finalized the deal with the customer. This final rate is known as the “dealer markup.” Dealers are compensated a percentage of the dealer markup by Honda. The practice allowed local dealerships to charge consumers different rates regardless of creditworthiness, the CFPB alleged, which is discriminatory. The agency said that 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 CFPB claims that the dealer markup was used unfairly, and that Honda’s policies amounted to “permitting dealers to charge higher interest rates to consumer auto loan borrowers on the basis of race and national origin.” The CFPB investigation found that Honda charged African-American, Hispanic and Asian borrowers higher interest rates on car loans than it did for whites, even where their credit scores were good. Honda’s pricing and compensation structure affected thousands of minority borrowers by increasing the cost of loans by up to $250 over the course of the entire loan.
The consent order contains strong language against Honda’s policies. “The policy and practice of allowing dealers to mark up a consumer’s contract rate and then compensating dealers from that increased interest revenue without adequate controls and monitoring is not justified by legitimate business need and constitutes discrimination,” it said. However, the National Automobile Dealers Association (NADA) notes that dealer markups are common in the industry and that the CFPB order would hurt the ability of individual consumers and dealers to negotiate and offer lower rates to the most qualified borrowers for fear of further CFPB sanctions.