The US finance arm of Honda Motor Corp. has agreed to return $24 million to borrowers in a settlement with regulators who alleged that the company discriminated against minority car buyers by overcharging them on auto loan interest rates.
The Consumer Finance Protection Bureau found that American Honda Finance Corporation (AHFC), the finance arm, made minorities pay $150 to $250 more on average compared to white borrowers. The average black borrower paid $250 more, the average Latino paid more than $200 in such costs and the average Asian Pacific Islander was charged more than $150 in extra costs.
“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 US Atty. Eileen M. Decker of the Central District of California, according to the Los Angeles Times.
In a statement, AHFC said that it opposes discrimination and disagreed with how the bureau, along with the Justice Department, determined discrimination.
“We firmly believe that our lending practices have been fair and transparent,” the company said.
However, “we nonetheless share a fundamental agreement in the importance of fair lending,” it added.
The finance arm is an indirect lender and makes most of its loans through auto dealers. It was previously allowed to hike the interest rate by up to 2.25 percentage points. But as a result of the settlement, AFHC has agreed to spend $1 million on a financial education program for minority borrowers, regulators said.
Additionally, Honda has agreed to cap dealer markups to 1.25 percentage point for loans with terms of five years or less, and 1 percentage point for longer-term loans.
The Justice Department praised the settlement and called it groundbreaking, with specific reference to the markup caps.
“We believe that Honda’s new compensation system balances fair compensation for dealers and fair lending for consumers,” said Vanita Gupta, head of the Justice Department’s civil rights division. “We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing.”
Similarly to most auto lenders, Honda acquires most of its loans through car dealers that assist customers in paying for their vehicles by submitting their loan applications to the auto company.
Honda dealers were able to boost interest rates based on their discretion and were able to collect larger payments from Honda by charging more, the Justice Department said.
Ira Rheingold, executive director of Washington, DC-based National Association of Consumer Advocates, told the Associated Press that the practice is widespread throughout the industry.
“It’s a horrible process,” Rheingold said, according to the news agency. “As long as a car dealer arranges financing, and there’s no control over what the car dealer can charge, there’s going to be abuse and there’s going to be discrimination, because they’re going to look you over and say, ‘I can get away with charging you more.’”
(With reports from CNN, Los Angeles Times, Reuters and The Associated Press)