The auto finance arm of Honda on Wednesday agreed to repay $24 million to minority borrowers to settle a Justice Department complaint that it overcharged them.
Thousands of minorities paid higher interest rates on Honda auto loans than white borrowers, according to a Justice Department complaint filed in a federal Los Angeles court.
Honda pledged to restructure its auto financing program as part of the settlement, the company and DOJ said.
The auto company’s finance arm, American Honda Finance Corp., does not make loans directly to consumers. Instead, it receives loan applications from car dealers which can vary a loan’s interest rate based on the borrower’s creditworthiness.
Honda had authorized dealers to mark-up interest rates by 2.25 percent, prosecutors said. Now, those mark-ups will be held to 1.25 percent if the loan is for five years or less, Honda said.
Regulators found rate discrimination within those mark-ups, Assistant Attorney General Vanita Gupta said in an interview. By placing a cap on such mark-ups, the settlement attempts to curb discriminatory lending, Gupta said.
But auto industry advocates are concerned the rate ceiling could hurt consumers.
“Today’s government-imposed order will hamstring the ability of thousands of consumers to negotiate lower interest rates with their local auto dealership,” said NADA chairman Bill Fox in a statement. “This enforcement action artificially constrains the right of consumers to benefit from interest rate reductions.”
But consumers are left in the dark to begin with, Gupta said. When consumers are handed financing proposal, they don’t know how much dealers have added to it.
“Consumers are at a disadvantage by not being able to know what the interest rates are and where the mark-ups are,” Gupta said.
The Justice Department and the Consumer Financial Protection Bureau began investigating Honda’s loan rates in 2013 and found that minority borrowers were paying between $150 and $250 more than white borrowers.
In a statement, Honda said it doesn’t discriminate against borrowers.
American Honda Finance Corp. “strongly opposes any form of discrimination, and we expect our dealers to uphold this principle as well,” the statement said. “We firmly believe that our lending practices have been fair and transparent.”
The Department of Justice and Consumer Financial Protection Bureau will provide Honda a list of impacted consumers who are entitled to remuneration, Honda and CFPB spokesmen said. Honda will then contact and distribute money from the $24 million-fund to those consumers.
“The hope really is that Honda’s leadership is going to trigger the rest of industry to constrain dealer mark-ups and discriminatory pricing,” said Gupta.
Honda will also pay the Justice Department another $1 million to fund an auto consumer financial education program.