Past practices by American Honda Finance resulted in thousands of African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates than white borrowers for their auto loans, according to U.S. authorities.
This was done without regard to these consumers’ creditworthiness, according to the U.S. Consumer Financial Protection Bureau (CFPB).
As part of a consent order announced Tuesday, Honda will change its pricing and compensation system to “substantially reduce dealer discretion and minimize the risks of discrimination,” according to the CFPB. Honda Finance will also pay $24 million in restitution to affected borrowers.
“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. “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.”
Auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans.
As an indirect auto lender, Honda establishes 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. This is typically 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 percent for contracts with terms of 5 years or less, and 2 percent for contracts with longer terms.
However, Honda’s practices 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, the CFPB states.
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.
Read the CFPB’s consent order with American Honda Finance.