Toyota captive faces £21.9 million compensation bill

The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) have reached a settlement with Toyota Motor Credit, the largest captive lender in the US, over claims the company discriminated against car buyers from ethnic minority groups.

The regulators are ordering the captive to change its pricing and compensation system to substantially reduce dealer discretion and accompanying financial incentives to mark up interest rates.

As part of the order, Toyota Motor Credit is also required to pay up to $21.9 million in restitution to thousands of African-American and Asian and Pacific Islander borrowers who paid higher interest rates than white borrowers for their auto loans, without regard to their creditworthiness, as a result of its past practices.

“We are dedicated to promoting fair and equal access to credit in the auto finance marketplace,” said CFPB director Richard Cordray. “Toyota Motor Credit is among the largest indirect auto lenders, and we commend its industry leadership in shifting to reduced discretion to address the significant fair lending risks.”

“Toyota’s reforms will level the playing field to ensure that all eligible borrowers – regardless of their race or national origin – can sign auto loans with fair terms and reasonable interest rates,” said principal deputy assistant attorney general Vanita Gupta, head of the DPJ’s civil rights division. “While dealerships deserve fair compensation for the valuable customer service they provide, federal law protects consumers against higher price markups simply because of what they look like or where they come from. We commend Toyota for crafting a new compensation system that strikes an appropriate balance for dealers and consumers.”

Dealer markup

The CFPB said it began its investigation into Toyota Motor Credit in April 2013. During the period of review, it found dealer markup policies which permitted dealers to increase consumers’ interest rates by as much as 2.5%.
As a result, the agency claimed, thousands of African-American borrowers were charged, on average, over $200 more for their auto loans, while thousands of Asian and Pacific Islander borrowers paid, on average, over $100 more.

The investigation did not find that Toyota Motor Credit intentionally discriminated against its customers, but rather that its discretionary pricing and compensation policies resulted in discriminatory outcomes.

Following the CFPB and DOJ’s findings, Toyota Motor Credit has agreed it will reduce dealer discretion to mark up the interest rate to only 1.25% above the buy rate for auto loans with terms of five years or less, and 1% for auto loans with longer terms. Toyota Motor Credit also has the option under the order to move to non-discretionary dealer compensation.

The CFPB said it did not assess penalties against Toyota Motor Credit because of the proactive steps the company is taking that directly address fair lending risk by substantially reducing or eliminating discretionary pricing and compensation systems.

The action against Toyota Motor Credit marks the fourth in a series of joint CFPB and DOJ public resolutions designed to address the fair lending risks in dealer discretion and financial incentives. In December 2013, the regulators required Ally to pay $80 million in consumer restitution and $18 million in civil money penalties over similar instances of discrimination.

In July 2015, American Honda Finance was ordered to pay $24 million in consumer restitution and substantially reduce or entirely eliminate dealer discretion, while in September 2015, Fifth Third Bank was required to pay $18 million in compensation.