Honda Forced to Reform, Pay Penalty Due to Discriminatory Lending Practices

Honda Forced to Reform, Pay Penalty Due to Discriminatory Lending Practices
Image: Honda
July 14, 2015

The Department of Justice (DOJ) took steps this week to ensure that auto loan rates will be determined by credit rating and not by the color of the applicant's skin.

Along with the Consumer Financial Protection Bureau (CFPB), the DOJ resolved an action with American Honda Finance Corporation that will put into place measures to address discretionary auto loan pricing and compensation practices. Honda has historically forced African-American, Hispanic, and Asian and Pacific Islander borrowers to pay higher rates than white customers, regardless of credit rating.

Honda will change its pricing and compensation system to substantially reduce dealer discretion and minimize the risks of discrimination, and will pay $24 million in restitution to affected borrowers.

"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 the head of DOJ's Civil Rights Division, Principal Deputy Assistant Attorney General Vanita Gupta.

Honda is an indirect auto lender. These lenders set a risk-based "buy rate", and provides it to auto dealers. However, dealers are allowed to charge a "dealer markup", increasing the rate at which a specific client will pay. This discretion afforded to dealers is where discrimination crept into the system.

Auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans.

This enforcement action is the result of a joint CFPB and DOJ investigation that began in April 2013. The agencies investigated Honda's indirect auto lending activities' compliance with the Equal Credit Opportunity Act, which prohibits creditors from discriminating against loan applicants in credit transactions on the basis of characteristics such as race and national origin.