American Honda Finance Corporation (AHFC)has reached an agreement to pay $24m in compensation to customers after the US Consumer Financial Protection Bureau (CFPB) and US Department of Justice (DOJ) accused it of discriminatory lending practises.
According to the allegations, AHFC was engaged in a pattern or practise of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in auto lending.
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Under the terms of the original charge, African-Americans were charged $250 more than a white customer over the course of a loan, a Hispanic customer $200 more and an Asian/Pacific Islander $150 more. Under the US Equal Credit Opportunity Act, discrimination of this sort is prohibited in all forms of lending, including for cars.
Honda was accused of having policy and practise allowed dealers to do so by allowing for mark-ups in the interest rates on automobile loans in a hidden manner not based on the borrower’s creditworthiness or other objective criteria related to borrower risk.
During the period that was under investigation (between 1 January 2011 and 14 July, 2015) AHFC allowed dealers to mark-up interest rates by up to 2.25% for contract tersm of five years or less, and 2% for contracts with longer terms.
The DOJ said that AHFC did not provide adequate constraints or monitoring across its portfolio of loans to prevent discrimination. As a result, it was said, thousands of minority customers over-paid for their car.
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By GlobalDataAs well as the $24m compensation, AHFC has agreed to change its allowed mark-up rates to 1.25% for shorter loans and 1% for longer loans.
Vanita Gupta, head of the Civil Rights Division at the DOJ, said: ""We commend Honda for its leadership in agreeing to impose lower caps on discretionary mark-ups and for its commitment to treating all of its customers fairly without regard to race or national origin.
"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 mark-up to address discriminatory pricing."
Richard Cordray, director of the CFPB said: "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 Eileen Decker, US attorney 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 a statement, AHFC said: "AHFC strongly opposes any form of discrimination, and we expect our dealers to uphold this principle as well. We firmly believe that our lending practices have been fair and transparent.
"AHFC has a difference of opinion with the CFPB and the DOJ regarding the methodology used to make determinations about lending practices, but we nonetheless share a fundamental agreement in the importance of fair lending."
It said it would announce later this year adjustments to its caps for dealers in setting the rate for retail instalment contracts lower than the present level. It will implement this change in combination with other adjustments and modifiers in a way that continues to support Honda and Acura dealers’ present business compensation with a full array of financing options.
