American Honda Finance Corp.’s recent consent order with the Consumer Financial Protection Bureau and the U.S. Department of Justice over alleged pricing discrimination was a first for a captive finance company, but it won’t be the last.
“We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing,” said Vanita Gupta, head of the DOJ’s Civil Rights Division.
Toyota Motor Credit Corp. and Nissan Motor Acceptance Corp., for instance, have already acknowledged that they, too, are in negotiations with the CFPB over questions about their lending policies.
Keep in mind this is also before the CFPB’s larger participant rule for larger, non-bank auto lenders takes effect, in late August. Non-banks like the captives for Honda, Toyota and Nissan were already subject to CFPB enforcement actions, but the larger participant rule extends the CFPB’s jurisdiction for the first time to conduct its own examinations of non-banks.
In addition, the Honda Finance consent order was the first one with an auto lender that calls for lower ceilings on dealer reserve, also known as dealer markup. The CFPB’s critics in the auto finance industry and in Congress accuse the bureau of trying to regulate dealerships indirectly, through lenders.
Lowering “voluntary” limits on dealer markup that were set in the early 2000s isn’t a new idea. In September 2014 the CFPB stated in a Supervisory Highlights report that “significant limits on markup, such as a limit of 100 basis points [that is, 1%], may reduce fair lending risk and significantly reduce the need for certain compliance management activities.”
In the Honda Finance consent order, the captive accepted a limit of 1.25% on loans up to 60 months, and a 1% cap for longer loans. Until now, the CFPB has said it wanted lenders to switch to flat fees or some other non-discretionary form of dealer compensation, such as a fixed percent of the amount financed.
Honda Finance’s settlement also requires the captive to pay $24 million in restitution to
minority borrowers who were allegedly affected.
