WASHINGTON—Honda Motor Co.'s American finance arm on Tuesday
agreed to pay $25 million to settle allegations that it charged
higher loan rates to minority customers, part of a push by federal
officials to alter lending practices by car companies.
The Justice Department had accused American Honda Finance Corp.
of charging black, Hispanic and Asian car buyers higher interest
rates on auto loans. The company won't pay any civil penalty but
will instead pay $24 million to a fund for car buyers who were
overcharged, federal officials said. An additional $1 million will
pay for a consumer-education effort.
American Honda Finance said it disagrees with the Consumer
Financial Protection Bureau and the Justice Department "regarding
the methodology used to make determinations about lending
practices, but we nonetheless share a fundamental agreement in the
importance of fair lending."
Federal officials said it is the first settlement where an auto
lender has agreed to alter its lending practices, something they
hope will become a blueprint for other car companies.
"We are looking at the entire spectrum of the auto-lending
market," said Vanita Gupta, head of the Justice Department's
civil-rights division. She said discriminatory practices in auto
loans is a "pervasive problem," while declining to identify
specific companies.
Ms. Gupta said Honda's new lending 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 markups to address discriminatory pricing."
The government has been probing the auto-lending market for
several years. In 2013 it struck a $98 million deal with Ally
Financial Inc., the former consumer-credit unit of General Motors
Co., to settle a probe of its lending practices. Ally didn't admit
wrongdoing under the agreement, which called for monitoring of
lending practices but didn't require changes.
Bill Fox, chairman of the National Automobile Dealers
Association said the Honda settlement "will hamstring the ability
of thousands of consumers to negotiate lower interest rates with
their local auto dealership. This enforcement action artificially
constrains the right of consumers to benefit from interest rate
reductions of up to 1% of the APR on their next auto loan."
Honda doesn't directly make loans to car buyers. It is known as
an indirect lender because car dealers help customers pay for their
purchase by submitting their loan application to Honda's finance
arm. Under the settlement terms, Honda will put new limits on the
dealer markup for such loans, officials said.
A typical auto loan lasts five years. Federal officials say that
over the course of such loans, the average black purchaser ended up
paying over $250 more than a similarly-situated white customer. The
average Hispanic victim ended up paying $200 more, and the average
Asian victim ended up paying $150 more.
Honda said the settlement is proof of the company's "commitment
to work together to be part of the solution and to establish the
path forward that best supports our Honda and Acura customers and
dealers with clear and convenient financing options."
Write to Devlin Barrett at devlin.barrett@wsj.com
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