Honda Finance Settles Discrimination Investigation

American Honda Finance Corporation will pay $24 million in compensation and change the way it does business to settle a discrimination case brought by the Justice Department and the Consumer Financial Protection Bureau. The two federal agencies teamed up to investigate complaints about American Honda Finance Corporation’s unsavory lending practices. Borrowers alleged that Honda Finance was engaged in a pattern of discrimination in its lending practices. Specifically the joint investigation looked at a system of subjective and unsupervised discretion in loan pricing that resulted in African American, Asian, Pacific Islander and Hispanic borrowers paying higher interest than other loan customers. This was not an isolated instance of a rogue employee doing the wrong thing. The practice was widespread, affecting thousands of minority customers. The DOJ and CFPB coordinated investigation revealed that, on average, African Americans were made to pay more than $250 more than whites over the course of the loan; Hispanics $200 more on average; and Asian/Pacific Islanders $150 more on average. All, because of their race or national origin, not because of their credit-worthiness.

The crux of the problem was that Honda Finance, like other captive auto lenders, allowed car dealers wide discretion to vary the interest rate beyond that which could be justified by objective factors of credit-worthiness. Often the car buyer will ask the finance manager something like, “What’s the best rate you can get me?” Or, “What do I qualify for?” The finance manager comes back with a number that is higher than that initially set by the bank, but the borrower has no idea that is not the lowest rate based on credit-related factors. They have no idea the rate offered is based on race-based prejudice rather than market-based factors. Honda Finance encouraged this behavior with its incentive system that paid the dealers more for loans that included a higher interest markup. One might say that Honda Finance incentivized deceptive or discriminatory conduct.

As a result of the settlement, Honda will limit the dealer’s discretion to charge interest rate markups and change the way it pays the dealers to place its loans. Justice Department Civil Rights Division leader Vanita Gupta explained, “We believe that Honda’s new compensation system balances fair compensation for dealers and fair lending for consumers. We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup in address discriminatory pricing.”

It is not hard to read between the lines. Gupta clearly implies that Honda Finance is not alone. Other dealers and lenders also conspire to offer minorities less favorable terms than they offer to whites. Interest should be a function of the cost of credit, related to the ability of the borrower to repay the loan. Whether a borrower has light or dark skin – or comes from Kenya, Tonga or Tennessee – should be irrelevant to the rate of interest he or she pays. The Equal Credit Opportunity Act (ECOA) and other consumer protection laws prohibit discriminatory pricing.

The landmark settlement was filed this week in the Central District of California. The terms must now be approved by the court.