By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau and Department of Justice have resolved an action with Toyota Motor Credit Corporation for allegedly charging thousands of minority buyers higher rates for auto loans regardless of the borrower’s creditworthiness. Under the agreement, affected borrowers will receive up to $21.9 million. Toyota also agreed to change its pricing and compensation system to substantially reduce dealer discretion and accompanying financial incentives to mark up interest rates.
“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.”
“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 DOJ’s 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.”
This joint action marks the fourth in a series of joint CFPB and DOJ public resolutions that address the fair lending risks in dealer discretion and financial incentives. The action also marks the third resolution that minimizes fair lending risks by substantially reducing dealer discretion and financial incentives.
According to the CFPB, auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans. As an indirect auto lender, Toyota Motor Credit sets interest rates, or “buy rates,” for consumers based on credit scores and other risk criteria. Those rates are conveyed to auto dealers. The bureau said that indirect auto lenders like Toyota Motor Credit allow auto dealers to charge a higher interest rate when they finalize the deal with the consumer, an action typically called “dealer markup.”
Charges. The bureau’s stipulation, filed in an administrative action, alleges that Toyota Motor Credit violated the Equal Credit Opportunity Act (15 U.S.C. §§1691-1691f) and its implementing Regulation B (12 CFR Part 2002) for permitting dealers to charge higher interest rates to consumer auto loan borrowers on the basis of race and national origin. The DOJ has alleged the same violations in a civil action filed in the United States District Court for the Central District of California styled United States of America v. Toyota Motor Credit Corporation, filed on or about Feb. 2, 2016.
Consent orders. Under the CFPB’s consent order, and the DOJ’s proposed consent order, in addition to requiring Toyota Motor Credit to pay $21.0 million in remediation, the settlement requires Toyota to improve its monitoring and compliance systems. The settlement allows Toyota to experiment with different approaches toward lessening discrimination and requires it to regularly report to the CFPB and DOJ on the results of its efforts as well as discuss potential ways to improve results.
Further, the settlement provides for an administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the CFPB and DOJ identify as victims of Toyota Motor Credit’s discrimination. The DOJ and CFPB will make a public announcement and post information on their websites once more details about the compensation process become available.
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