Toyota Motor Credit agreed to pay a $21.9 million fine to settle complaints by federal agencies that it used discriminatory policies when setting interest rates for auto loans for minorities.
TMC, the automaker’s finance arm, also agreed to change its pricing and compensation system by reducing dealer discretion and accompanying financial incentives to mark up interest rates as part of the agreement it reached with the Consumer Financial Protection Bureau and U.S. Department of Justice. The CFPB, a new agency created by reforms of the financial system promoted by the Obama administration, said Toyota Motor Credit has agreed.
The fine is restitution to thousands of African-American and Asian and Pacific Islander borrowers who paid higher interest rates than white borrowers for their auto loans, without regard to their creditworthiness, as a result of its past practices.
“We are dedicated to promoting fair and equal access to credit in the auto finance marketplace,” said CFPB Director Richard Cordray. “Toyota Motor Credit is among the largest indirect auto lenders, and we commend its industry leadership in shifting to reduced discretion to address the significant fair lending risks.”
In the complaint, the agencies claimed that from 2011 through 2013 the average African-American customer paid more than $200 and the average Asian or Pacific Islander customer more than $100 more during the term of the loan because of discrimination.
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“Toyota’s reforms will level the playing field to ensure that all eligible borrowers – regardless of their race or national origin – can sign auto loans with fair terms and reasonable interest rates,” said Principal Deputy Assistant Attorney General Vanita Gupta, head of the Civil Rights Division.
“While dealerships deserve fair compensation for the valuable customer service they provide, federal law protects consumers against higher price markups simply because of what they look like or where they come from. We commend Toyota for crafting a new compensation system that strikes an appropriate balance for dealers and consumers.”
While Toyota agreed to settle the complaint, officials “respectfully disagrees with the agencies’ methodologies to determine whether industry lending practices have been discriminatory.”
The agreement limits the amount dealers can mark up a loan to a maximum of 125 basis points, according to its statement. Toyota wasn’t alone in dealing with this issue.
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Ally Financial agreed to establish an $80 million restitution fund to settle similar allegations. The finance arms for Honda Motor Co. and Fifth Third Bancorp agreed to pay fines of $24 million and $18 million respectively.
“The CFPB’s campaign to eliminate auto loan discounts has already cost consumers money and eroded the rights that every consumer has to negotiate and benefit from a competitive marketplace,” said a spokesman for the National Automobile Dealers Association, in a statement.
However, federal officials were resolute in their belief that the finance arm used an illegal policies during the process.
“No consumer should be forced to pay more money for a loan because of their race or national origin,” said U.S. Attorney Eileen M. Decker of the Central District of California. “This settlement resolves our claims by providing compensation for affected consumers and seeking to ensure that future loans funded by Toyota reflect equal terms.”
Auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans. When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third-party auto lender like Toyota Motor Credit. Toyota Motor Credit is the largest captive auto lender in the United States and the fifth largest auto lender overall.
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As an indirect auto lender, Toyota Motor Credit sets interest rates, or “buy rates,” for consumers based on credit scores and other risk criteria. The rates are conveyed to auto dealers. Indirect auto lenders like Toyota Motor Credit then allow auto dealers to charge a higher interest rate when they finalize the deal with the consumer. Toyota Motor Credit permitted dealers to mark up consumers’ interest rates as much as 2.5%.