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Tuesday, July 14, 2015

Justice Department and Consumer Financial Protection Bureau Reach Groundbreaking Settlement to Resolve Allegations of Auto Lending Discrimination by Honda

The Department of Justice and the Consumer Financial Protection Bureau (CFPB) announced today a groundbreaking settlement to resolve allegations that American Honda Finance Corporation (Honda) engaged in a pattern or practice of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in auto lending.  Honda is based in Torrance, California. 

The settlement is especially noteworthy because of the company’s commitment to significantly limit the discretion of car dealers to charge interest rate markups on Honda loans.  Specifically, Honda has agreed to change the way it prices its loans by limiting dealer markup to 125 basis points (or 1.25 percentage points) for loans of 60 months or less, and to 100 basis points (or 1 percentage point) for loans greater than 60 months.  The settlement also provides $24 million in compensation for alleged victims of past discrimination by the nation’s ninth largest auto lender.

“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 Vanita Gupta, head of the Civil Rights Division.  “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.”

The coordinated investigations by the department and the CFPB that preceded today’s settlement determined this system of subjective and unguided pricing discretion directly results in Honda’s qualified African-American, Hispanic and Asian/Pacific Islander borrowers paying more than qualified non-Hispanic white borrowers.  The department and CFPB anticipate that Honda’s new caps on discretionary markups will substantially reduce or eliminate these disparities.

Honda is known as an “indirect” auto lender because, rather than taking applications directly from consumers, the company makes most of its loans through car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Honda.  Honda’s business practice, like most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Honda initially sets based on the borrower’s objective credit-related factors.  Dealers receive greater payments from Honda on loans that include a higher interest rate markup. 

The settlement resolves claims by the department and the CFPB that Honda discriminated by charging thousands of African-American, Hispanic and Asian/Pacific Islander borrowers higher interest rates than non-Hispanic white borrowers.  The agencies claim that Honda charged borrowers higher interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.  The United States’ complaint alleges that the average African-American victim was obligated to pay over $250 more during the term of the loan because of discrimination, the average Hispanic victim was obligated to pay over $200 more during the term of the loan because of discrimination and the average Asian/Pacific Islander victim was obligated to pay over $150 more during the term of the loan because of discrimination.  The Equal Credit Opportunity Act (ECOA) prohibits such discrimination in all forms of lending, including auto lending.  Honda’s settlement with the Justice Department, which is subject to court approval, was filed today in the U.S. District Court of the Central District of California in conjunction with the Justice Department’s complaint.  Honda resolved the CFPB’s claims by entering into a public administrative settlement.

“The CFPB is committed to creating a fair marketplace for all consumers, and other auto lenders should take note of today’s action,” said Director Richard Cordray of the Consumer Financial Protection Bureau.  “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.”

“Honda’s financing practices that allowed dealerships to mark up individual loans resulted in illegal discrimination, with minority car buyers paying more for their loans than non-minority buyers with similar credit histories,” said U.S. Attorney Eileen M. Decker of the Central District of California.  “This settlement provides for Honda to contribute $24 million to a settlement fund to provide redress for thousands of minority borrowers, not only in this district, where Honda’s United States operations are based, but throughout the country.  It sends the clear message that discrimination of any kind is intolerable, and that other auto companies should follow Honda’s lead in taking steps to ensure that their sale and financing practices do not result in discrimination.”

In addition to the $24 million in payments for its past conduct, under the Justice Department consent order, Honda will also pay $1 million to fund a consumer financial education program focused on consumer auto finance that is designed to benefit African-American, Hispanic and Asian/Pacific Islander populations.

The settlement also requires Honda to improve its monitoring and compliance systems.  The settlement allows the lender to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results.  The department commends Honda for working cooperatively to reach an appropriate resolution of this case.

The settlement provides for an administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of Honda’s discrimination.  The department and the CFPB will make a public announcement and post information on their websites once more details about the compensation process become available.  Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time. 

The Civil Rights Division, the U.S. Attorney’s Office of the Central District of California and the CFPB are members of the Financial Fraud Enforcement Task Force.  President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring a powerful array of criminal and civil enforcement resources.  The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets and recover proceeds for victims of financial crimes.  For more information on the task force, visit www.StopFraud.gov.  

The department’s enforcement of fair lending laws is conducted by the Fair Lending Unit of the Housing and Civil Enforcement Section in the Civil Rights Division.  Since the Fair Lending Unit was established in February 2010, it has filed or resolved 40 lending matters under the Fair Housing Act, ECOA and the Servicemembers Civil Relief Act.  The settlements in these matters provide for a total of at least $1.2 billion in monetary relief for impacted communities.  The Attorney General’s annual reports to Congress subject to ECOA highlight the department’s accomplishments in fair lending and are available at www.justice.gov/crt/publications

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Updated August 4, 2015