American Honda Finance Corporation (AHFC) will reduce dealer discretion to mark up customer buy rates, to address charges of discriminatory auto loan pricing, in a consent order announced today with the Consumer Financial Protection Bureau and the U.S. Department of Justice.
As part of today’s order, Honda will reduce the permitted dealer mark-up to 125 basis points (1.25%) above the buy rate for loans of 60 months or less, from 2.25% previously. For longer loans, the new ceiling is 100 basis points (1%), from from 2% previously. The settlement also requires Honda to pay $24 million in restitution to minority borrowers who were allegedly affected.
“We recognize that dealerships perform a valuable service in connecting customers with lenders and that they should be fairly compensated for that service,” said Vanita Gupta, principal deputy assistant attorney general for the DOJ’s Civil Rights Division.
“We believe that Honda’s new compensation system balances fair compensation for dealers and fair lending for consumers.” The CFPB and DOJ said they would not assess any civil penalties on Honda Finance, due to the company’s “proactive steps” and cooperation. “We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing,” Gupta said.
In December 2013, the CFPB and the DOJ socked Ally Financial with an $18 million civil penalty on top of $80 million in restitution, for alleged pricing discrimination. Ally Financial denied tolerating discrimination, but accepted its consent order.
The Honda captive today also denied tolerating discrimination. “AHFC opposes any form of discrimination,” according to written statement on the company’s web site. “We firmly believe that our lending practices have been fair and transparent,” the company said.
“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.
As part of the today’s settlement, Honda had the option to either reduce dealer discretion or eliminate it entirely and switch to flat fees. Attorney Kenneth Rojc, a partner at Nisen & Elliott LLC, Chicago, said the CFPB doesn’t seem to be looking for “outright prohibition” of dealer markup. “It [the consent order] does show me that the rate participation programs can be implemented in a non-discretionary way,” Rojc told Auto Finance News.
Reputation risk is a key concern for organizations such as AHFC, Rojc said. “Cases like this are being settled in the boardroom, not in the courtroom. They [AHFC] were looking to maintain a relationship with the federal regulators and make sure that public perceives them as non-discriminatory.”
