The US Dept. of Justice and the Consumer Financial Protection Bureau said they reached a “groundbreaking settlement” to resolve allegations that American Honda Finance Corporation engaged in a pattern or practice of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in auto lending.
The company also agreed to significantly limit the discretion of car dealers to charge interest-rate markups on Honda loans. Torrance, Calif.-based Honda will change the way it prices loans by limiting dealer markup to 125 basis points (or 1.25 percentage points) for loans of 60 months or less, and to 100 basis points (or 1 percentage point) for loans greater than 60 months.
The settlement also provides $24 million in compensation for alleged victims of past discrimination by the nation’s ninth-largest auto lender and $1 million to fund a consumer financial education program designed to benefit African-American, Hispanic and Asian/Pacific Islander populations.
“We commend Honda for its leadership in agreeing to impose lower caps on discretionary markups and for its commitment to treating all of its customers fairly without regard to race or national origin,” said Vanita Gupta, head of the Civil Rights Division, on July 14.
The coordinated investigations by the department and the CFPB that preceded today’s settlement determined that the average African-American victim was obligated to pay over $250 more during the term of the loan because of discrimination, the average Hispanic victim was obligated to pay over $200 more during the term of the loan because of discrimination and the average Asian/Pacific Islander victim was obligated to pay over $150 more during the term of the loan because of discrimination. The Equal Credit Opportunity Act prohibits such discrimination in all forms of lending, including auto lending.
Honda is known as an “indirect” auto lender because, rather than taking applications directly from consumers, the company makes most of its loans through car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Honda. Its business practice, like most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Honda initially sets based on the borrower’s objective credit-related factors. Dealers receive greater payments from Honda on loans that include a higher interest-rate markup.
The settlement also requires Honda to improve its monitoring and compliance systems. The settlement allows the lender to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results. The department commends Honda for working cooperatively to reach an appropriate resolution of this case.
The settlement provides for an administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of Honda’s discrimination. The agencies will make a public announcement and post information on their websites once more details about the compensation process become available. Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time.
