Three of the nation's largest indirect auto lenders are poised to limit discretionary pricing for dealers after regulators accused them of allowing partners to mark up loans at higher rates to minorities, according to confidential documents.
In proposed consent orders obtained by American Banker, the Consumer Financial Protection Bureau is planning to cite American Honda Finance Corp., Toyota Motor Credit Corp. and Nissan Motor Acceptance Corp. beginning as early as July for unintentional discrimination.
If approved and signed, the orders would require all three firms to pay renumeration to affected consumers, but could forgo civil money penalties in return for changing how much flexibility they give dealer partners to mark up the cost of an auto loan. Though the CFPB cannot directly supervise auto dealers, it has been scrutinizing indirect auto lenders' policy of allowing price discretion to partners, arguing it often results in minorities paying more.
Under the proposed deals, Honda, Toyota and Nissan's financing arms would agree to cut the price discretion that they offer dealers by roughly half of their current rates. While sources caution that the orders could still change because they are not yet finalized, such an agreement would be a significant victory for the CFPB, which until now has struggled in its efforts to curb pricing discretion.
"If the CFPB can get the lenders to cut the caps — as unpalatable as that may be from a business perspective — you address what the CFPB sees as the systemic problem. It basically gets them closer to the fixed-rate option that the agency has pushed for," said Joe Rodriguez, of counsel at Morrison & Foerster, who formerly worked in the CFPB's fair-lending group.
A CFPB spokesman declined to comment for this article, citing the confidentiality of the enforcement process. A spokesperson for Nissan did not comment by deadline. Spokespersons for Honda and Toyota confirmed they are in discussions with the CFPB and Justice Department over the issue, but said they could not provide further details.
"We take seriously our commitment to diversity and inclusion, and that commitment extends to fair and responsible lending practices," a spokesman for Toyota added. "In keeping with this deeply held commitment, it is important to note that as an indirect lender TFS [Toyota Financial Services] has no visibility into the race or ethnicity of our customers or credit applicants, and these factors never influence our credit or pricing decisions."
Though the settlement amounts are still pending approval, Honda is facing $24 million in consumer redress on allegations that its dealers charged higher rates to more than 164,600 minorities because of its dealer price discretion policy. Under the deal, it would not pay an additional civil money penalty in return for limiting dealer discretion going forward to 125 basis points on contracts that are 60 months or less, and 100 basis points for contracts longer than 60 months, among other stipulations. That is roughly half the 200 to 225 basis point range it currently allows.
The exact redress amounts for Toyota and Nissan were not yet set by mid-June, according to the obtained documents. But based on initial recommendations made by CFPB staff in November, Toyota will have to pay between $14 million to $102 million to consumers to settle allegations it charged higher rates to 127,285 minorities. Nissan is facing $8 million to $75 million in redress for an affected 74,405 minority borrowers.
The CFPB has encouraged lenders to adopt a flat-fee structure with dealers which the agency says would prevent them from giving higher rates to minorities. But the auto dealers have resisted, arguing that giving them pricing flexibility is a key part of the process. The dealers and allies in Congress have also heavily questioned the agency over its methodology in determining discrimination.
The proposed CFPB deals come after the Supreme Court last week upheld the use of disparate impact by regulators under the Fair Housing Act. Though the CFPB is applying disparate impact under the Equal Credit Opportunity Act instead, observers said the high court's decision will embolden regulators to use disparate impact theory, regardless of which law is applied.
"With the Supreme Court affirming the disparate impact doctrine, the reality is that the CFPB is likely to continue an aggressive push against dealer markups through increased supervisory scrutiny and targeted enforcement actions against indirect auto lenders," said Isaac Boltansky, an analyst at Compass Point Research & Trading.
"If additional indirect auto settlements are ahead, it will be interesting to see whether the CFPB's actions will result in dealer behavior being altered even though the bureau does not have direct oversight of the industry. I think the lenders will be fine with lessening dealer pricing discretion. It's the auto dealers who will continue pushing back against the CFPB and my sense is that they will likely find some support on Capitol Hill given the statutory limitations on the bureau's oversight."