American Honda Finance Corp. agreed to pay as much as $25 million to settle discriminatory lending allegations as the U.S. has stepped up its scrutiny of car loans, the third-largest source of household debt.
The Honda unit that finances auto loans in the U.S. will offer $24 million in relief to borrowers who were allegedly overcharged by dealers since 2011, according to a settlement Tuesday with the Justice Department and the Consumer Financial Protection Bureau. An additional $1 million will be spent on consumer education programs.
The federal government in recent years has secured large discriminatory lending payments from mortgage companies, including a $335 million settlement with Countrywide Financial Corp., and has now turned its attention to auto loans. As part of the settlement, Honda said it would limit the amount a dealer could markup the interest rate of the loan.
“This represents the first indirect nationwide auto-lender to lower caps of this magnitude,” Vanita Gupta, head of the Justice Department’s Civil Rights Division, said in a phone interview. “We hope that Honda’s leadership will spur the rest of the industry to constrain auto-dealer markups to address discriminatory pricing.”
Ally Financial Inc. last year agreed to pay $98 million in the largest-ever settlement of an auto-loan discrimination case, while Evergreen Bank Group of Oak Brook, Illinois, in May promised $395,000 in compensation for alleged victims of discriminatory lending for motorcycles.
Toyota Motor Credit Corp. and JPMorgan Chase & Co. have each disclosed government investigations of discriminatory pricing related to loans.
Gupta said the Justice Department’s investigation of the auto-lending industry is continuing. Auto loans are the third-largest source of household debt after mortgages and student loans.
“Our investigations have found that allowing dealers the very broad discretion to mark up loans really increases the risk of discrimination,” she said. “We believe this to be a fairly widespread problem.”
U.S. authorities allege that Honda violated fair-lending laws by allowing dealers to charge higher interest rates on loans sought by African-American, Hispanic and Asian borrowers.
The average African-American borrower paid about $250 more for the loan than a white borrower, the Justice Department ad the CFPB said in its complaint. Hispanics paid $200 more while Asian and Pacific Islander borrowers paid $150 more during the term of the loan, the U.S. said.
Honda said it has treated all borrowers fairly and is agreeing to settle to avoid litigation, according to the consent order.
Honda “strongly opposes any form of discrimination, and we expect our dealers to uphold this principle as well,” American Honda Finance said in a statement. “We firmly believe that our lending practices have been fair and transparent.”
Honda doesn’t originate auto loans, though it purchases loans originated by dealers. The markup at issue in the case involves the difference between Honda’s buy rate and contract rate. The settlement requires approval from a federal judge.
The accord calls for an administrator to locate victims and make payments.
The case is U.S. v. American Honda Finance Corp., 15-cv-05264, U.S. District Court, Central District of California (Los Angeles).