‘Unfair’ auto loan pricing costs Honda captive $24 million

The Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) have reached a resolution with American Honda Finance Corporation (AHFC) over claims the lender’s past practices for assessing auto loans unfairly discriminated against some categories of borrower, with a consent order requiring the company to pay $24 million in restitution.

The regulators say the Honda captive’s actions resulted in thousands of African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates than white borrowers for their auto loans, without regard to their creditworthiness.

They have ordered the lender to put new measures in place to address discretionary auto loan pricing and compensation practices, with AHFC agreeing to change its pricing and compensation system to substantially reduce dealer discretion – a move which is likely to have repercussions for the whole auto finance sector.

“The CFPB is committed to creating a fair marketplace for all consumers, and other auto lenders should take note of today’s action,” said CFPB director Richard Cordray (pictured above). “Honda’s proactive decision to move to a new pricing and compensation system demonstrates industry leadership and represents a significant step towards protecting consumers from discrimination.”

“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 the head of DOJ’s civil rights division, principal deputy assistant attorney general Vanita Gupta.

“We recognize that dealerships perform a valuable service in connecting customers with lenders and that they should be fairly compensated for that service. We believe that Honda’s new compensation system balances fair compensation for dealers and fair lending for consumers. We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing,” Gupta added.

Dealer mark up

The CFPB and DOJ investigation found that Honda’s indirect lending arm permitted dealers to mark-up consumers’ interest rates by up 2.25% for contracts with terms of five years or less, and 2% for contracts with longer terms.

The regulators argue that this practice 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.

Under the new CFPB order, AHFC has agreed to 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. Honda also has the option under the order to move to non-discretionary dealer compensation entirely and eliminate the mark-up altogether.

In a statement, the company said: “AHFC opposes any form of discrimination. We firmly believe that our lending practices have been fair and transparent.”

“AHFC has a difference of opinion with the CFPB and the DOJ regarding the methodology used to make determinations about the lending practices, but we nonetheless share a fundamental agreement in the importance of fair lending,” the company said.

Honda is also to pay $1 million into an auto finance education program for minority borrowers.

Back door regulation

There have been strong reactions to the CFPB’s latest ruling, with the chairman of the Senate Banking Committee accusing the agency of using lenders as a “back-door” way to regulate auto dealerships, even though the bureau’s original remit specifically exempts most dealerships from its jurisdiction.

Senator Richard Shelby said: “Considering auto dealers were explicitly exempted … can this be seen as anything but a back-door attempt to regulate auto dealers?”

Leaders of the National Automobile Dealers Association (NADA), the National Association of Minority Automobile Dealers (NAMAD), and the American International Automobile Dealers Association (AIADA) have also registered their protest at the terms of the CFPB’s consent order.

“Today’s government-imposed order will hamstring the ability of thousands of consumers to negotiate lower interest rates with their local auto dealership,” said 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.”

NAMAD president Damon Lester said: “Today’s restriction of consumer rights is entirely unnecessary because a better alternative exists – the Fair Credit Compliance Policy & Program recommended by our associations. That alternative, which is modeled on prior DOJ consent orders, fully addresses fair credit concerns without displacing the ability of consumers to obtain discounted rates.”

“There’s no getting around the fact that this enforcement action is going to reduce the savings consumers depend on when financing a new vehicle,” said AIADA chairman Brad Hoffman. “Everyone in our industry is mystified as to why the government continues to overlook its own common-sense approach in favor of the anti-consumer methods forced on Honda Finance.”