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The U.S. financing arm of Honda Motor Co. has agreed to pony up $25 million to settle federal authorities’ charges that it saddled nonwhite borrowers with higher interest rates on car loans, regardless of the borrowers’ creditworthiness or risk factors.
According to the Consumer Financial Protection Bureau, thousands of African-American, Hispanic, and Asian and Pacific Islander borrowers fell victim to American Honda Finance Corp.’s discriminatory auto loan pricing.
Honda’s alleged auto lending discrimination led the average minority borrower to pay $150 to $250 more over the term of his or her auto loan than a similarly situated white borrower.
As part of the settlement with the CFPB and the Department of Justice, Honda agreed to pay $24 million in refunds to borrowers who were overcharged and devote $1 million to a consumer financial education effort. Honda also agreed to overhaul its discretionary auto loan pricing and compensation system.
In a statement, CFPB director Richard Cordray said:
“The CFPB is committed to creating a fair marketplace for all consumers, and other auto lenders should take note of today’s action. 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.”
The settlement is especially significant because Honda has pledged to use caps to limit the discretion of car dealers to mark up interest rates on Honda loans, according to the Justice Department. Dealers currently receive bigger payments from Honda on loans with a higher interest rate markup.
Vanita Gupta, head of the DOJ’s Civil Rights Division, said in a statement:
“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. 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.”
Gupta said she’s hopeful that other car companies will take note of Honda’s new lending practices and potentially make similar changes within their own companies.
“We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing,” Gupta added.
Although it agreed to settle the charges, Honda, the nation’s ninth largest auto lender, denied it practiced discriminatory lending.
Bill Fox, chairman of the National Automobile Dealers Association, told The Wall Street Journal that Honda’s settlement would “hamstring the ability of thousands of consumers to negotiate lower interest rates with their local auto dealership.”
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