Honda will pay $25 million to settle allegations its U.S. financing arm overcharged minority car buyers, federal officials announced.
The maker was one of several who allegedly allowed dealers to steer minority customers into loans that carried higher interest rates, supposedly due to higher credit risk. Dealers profited from that move because they received more money for generating those loans.
In a civil complaint, federal prosecutors alleged that, “Honda knew or had reason to know that its policy and practice of allowing dealers to mark up consumers’ interest rates created a substantial risk of discrimination.”
As part of the settlement, Honda U.S. financing subsidiary – the ninth-largest U.S. auto lender – will offer $24 million to help relieve the higher borrowing costs incurred by African-American, Hispanic and Asian and Pacific Islander buyers who were saddled with higher loan rates than whites. The money will be distributed without consideration of their actual credit records, according to the Consumer Financial Protection Bureau and Department of Justice.
It was determined that minority buyers of vehicles sold by Honda and its luxury arm Acura were paying anywhere from $150 to $250 more, over the life of their loans, than whites.
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An additional $1 million from Honda will be used to fund a consumer education program.
“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 Vanita Gupta, head of the Department of Justice’s Civil Rights Division.
Government officials suggested that other automotive lenders are now on notice to revise their own practices.
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But not everyone was pleased with the news. Groups representing the nation’s automobile dealers insisted the settlement will stifle competition and actually result in higher costs. According to the National Automobile Dealers Association, which represents more than 16,000 of the nation’s new vehicle franchisees, the result could be as much as 1% higher interest rates for buyers.
“There’s no getting around the fact that this enforcement action is going to reduce the savings consumers depend on when financing a new vehicle,” echoed Brad Hoffman, chairman of the smaller American International Automobile Dealers Association.
The dealer groups essentially contend that rather than unfairly penalizing minorities, lenders like American Honda Finance were simply rewarding buyers with good credit.
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How the settlement will impact the auto business remains to be seen. So-called sub-prime loans have become a critical tool for auto retailers looking to close deals with buyers who might not have the best credit – and dealers, in general, now often make as much or money on loans and other financial transactions as they do on the sale of the car itself. Manufacturers, meanwhile, often subsidize loans, especially for good credit risk customers as an alternative to traditional rebates.