WASHINGTON—The CFPB took another step in its crackdown on buy-rate financing, resolving an enforcement action with Toyota Motor Credit Corp. that will include the carmaker’s financing arm paying up to $21.9 million in restitution to minority borrowers.
The CFPB has been taking action against lenders that participate in buy-rate financing. Buy rate, also referred to as dealer mark-up, is when the lender provides the dealer with its rates, then allows the F&I department to mark up the rate at their discretion. Over the time period under CFPB review, Toyota Motor Credit permitted dealers to mark up consumers’ interest rates as much as 2.5%, the agency said.
In conjunction with the Department of Justice, the CFPB’s action requires that Toyota Motor Credit change its pricing and compensation system to “substantially reduce dealer discretion and accompanying financial incentives to mark up interest rates,” the CFPB stated. Toyota Motor Credit is also required to pay up to $21.9 million in restitution to thousands of African-American and Asian and Pacific Islander borrowers who paid higher interest rates than white borrowers for their auto loans, “without regard to their creditworthiness, as a result of its past practices,” the Bureau explained.
“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."
“We commend Toyota for its commitment to making changes to its business to ensure fair treatment for all customers, regardless of race or national origin,” said the head of DOJ’s Civil Rights Division, Principal Deputy Assistant Attorney General Vanita Gupta. “We also applaud its willingness to impose lower caps on discretionary mark-ups in a way that does not increase interest rates for borrowers. As we have in the past, we acknowledge that dealerships should be fairly compensated for the valuable service they perform in connecting customers with lenders. To that end, Toyota’s new compensation system provides fair compensation for dealers while protecting consumers against higher prices based on the color of their skin or national origin.”
“No consumer should be forced to pay more money for a loan because of their race or national origin,” said U.S. Attorney Eileen M. Decker of the Central District of California. “This settlement resolves our claims by providing compensation for affected consumers and seeking to ensure that future loans funded by Toyota reflect equal terms.”
In September 2014, the Bureau issued an edition of Supervisory Highlights that explained that the Bureau’s supervisory experience suggests that significantly limiting discretionary pricing adjustments may reduce or effectively eliminate pricing disparities.
The latest joint action marks the fourth in a series of CFPB and DOJ public resolutions that address the fair lending risks in dealer discretion and financial incentives. In December 2013, the CFPB and DOJ took an action against Ally Financial Inc. and Ally Bank requiring Ally to pay $80 million in consumer restitution and $18 million in civil money penalties. The action also required the implementation of an ongoing compliance management and consumer remuneration system or the elimination of discretionary mark-up altogether.
Tuesday’s enforcement action marks the third resolution that minimizes fair lending risks by substantially reducing dealer discretion and financial incentives, the CFPB said. In July 2015, the CFPB and DOJ took an action against American Honda Finance Corporation requiring Honda to pay $24 million in consumer restitution and substantially reduce or entirely eliminate dealer discretion. In September 2015, the CFPB and DOJ took an action against Fifth Third Bank requiring Fifth Third to pay $18 million in consumer restitution and substantially reduce or entirely eliminate dealer discretion.