Today 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 abuses arising from pricing and compensation practices. As a result, African-American, Hispanic, Asian and Pacific Islander Borrowers will receive $24 million for past discriminatory loan rates by Honda dealers.
Honda’s past practices resulted in thousands of non-Caucasian borrowers paying higher interest rates for their auto loans, without regard to their creditworthiness. As part of today’s order, Honda will change its pricing and compensation system to substantially reduce dealer discretion and minimize the risks of discrimination that are at the core of auto loan abuses.
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, 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% for contracts with terms of 5 years or less, and 2% for contracts with longer terms.
Today’s 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 because of characteristics such as race and national origin.
The investigation concluded that Honda’s policies:
1. 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.
2. 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.
Honda will now substantially reduce or eliminate dealer discretion to mark-up the interest rate to only 1.25% above the buy rate for auto loans with terms of 5 years or less, and 1% for auto loans with longer terms. Honda also has the option under the order to move to non-discretionary dealer compensation.
The Bureau said 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.”
The consent decree is a substantial, perhaps fatal, setback for dealer lobbying groups such as NADA and AIADA who have been fighting CFPB on auto loan abuses through non-discriminatory pricing.
“Today’s government-imposed order will hamstring the ability of thousands of consumers to negotiate lower interest rates with their local auto dealership,” claimed 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.”
Several thorny questions now arise:
- What are Nada’s legal options going forward or at least plausible scenarios in NADA’s view?
- Is NADA willing to accept flat fee lending and/or trimmed down markups?
- Is the NADA FOIA now irrelevant?
- Honda has supported NADA in the past, donating to several of your organization’s activities. Is this now a strained relationship? Has Honda broken ties with NADA?
- How many Honda dealers are NADA members? Have you heard from them?
- What are American Honda’s communications to NADA post consent decree?
