Toyota Financial Services was approved for early termination of a 2016 consent order — which alleged the captive’s dealer compensation model resulted in higher interest rates for minority borrowers — and the lender intends to raise markup caps following the decision, the company told Auto Finance News.
The consent order was lifted May 1, but is contingent on final court approval expected to come down in the company’s favor in the coming weeks, according to a filing with the Securities and Exchange Commission on Tuesday.
Although an enactment date has not been set, TFS will bump up dealer rate caps to 2% for terms up to 72 months, and up to 1.5% for 84-month loans, the captive told AFN.
The announcement comes just weeks after Congress passed legislation deregulating the Consumer Financial Protection Bureau bulletin that sparked the enforcement in the first place.
“The consent orders were to be effective for three years, until February 2019, unless the company met certain requirements at the end of the second year of the consent orders, in which case the term of the consent orders could be reduced from three years to two years,” Katherine Adkins, group vice president, general counsel, and secretary for Toyota Motor Credit Corp., wrote in the filing.
President Donald Trump is expected to sign the bill, which passed the second chamber of Congress earlier this month. The rollback rescinds the CFPB’s guidance that encourages lenders to cap — or institute flat fees — for the amount dealers can upcharge interest rates on approved loans.
While the rule was derided by the industry, three lenders — American Honda Finance Corp., Fifth Third Bank, and Toyota — were bound by consent orders to cap interest rate markups at 100 to 150 basis points. But with the consent order lifted, and legislation to roll back the regulation in place, TFS plans to change its policies and raise its caps, the lender told Auto Finance News.
“Modification of our dealer participation rate caps will enable us to continue serving the best interests of our customers while allowing us to remain competitive in the marketplace,” a spokesman told AFN in a statement. “It is important to reiterate that we do not tolerate discrimination of any kind, even perceived or unintentional – this principle extends to fair lending practices. As an indirect lender, Toyota Motor Credit Corp. has no visibility into the race or ethnicity of its customers or credit applicants, and these factors have no bearing on the company’s credit or pricing decisions.”
In contrast, a lawyer panel at the Auto Finance Performance and Compliance Summit unanimously agreed that since the initial bulletin was based on the Equal Credit Opportunity Act that lenders could still be fined if they don’t keep controls in place to limit racial discrimination at dealerships.
Yet, the Competitive Enterprise Institute released a 16-page report today detailing why it feels the CFPB does not have a justification for policing discrimination cases in this way under ECOA.
“While interpretive rules are merely designed to clarify what the law says, the auto lending bulletin stretched the ECOA to cover an entirely new arena that was not prescribed in the statute,” the report states. “Not only did this completely change the common understanding of the law, it imposed a new compliance burden on lenders that was not subject to the Administrative Procedure Act’s notice-and-comment rulemaking process.”
