Some components of Toyota Motor Credit’s settlement with the Department of Justice and the Consumer Financial Protection Bureau released on Tuesday are similar to what the regulators reached with American Honda Finance last summer.

The Justice Department and the CFPB explained the settlement is to resolve allegations that Toyota Motor Credit engaged in a pattern or practice of discrimination against African-American and Asian/Pacific Islander borrowers in auto financing.

Through the settlement, TMC agreed to limit “significantly” the discretion of dealers to charge interest rate markups on vehicle installment contracts. Furthermore, officials indicated the captive also committed that it will not increase the interest rates it quotes to dealers in order to fund additional nondiscretionary dealer compensation implemented as part of the settlement. 

The settlement also provides $19.9 million in compensation for borrowers who took out financing between January 2011 and January of this year and paid higher markup based on the alleged discrimination. 

Additionally, TMC will pay up to $2 million to African-American and Asian/Pacific Islander borrowers with markup disparities while the captive is preparing to implement the new policies. 

Officials noted the new policies must be in place by August.

Captive finance company response

Coinciding with the regulators’ announcement, Toyota Motor Credit shared its view of the situation on Tuesday.

“TMCC determined that a voluntary agreement was the preferred resolution of the agencies’ review because it helps preserve consumer financing options while fairly compensating its dealer partners and upholding its commitment to fair lending practices. TMCC is the latest of several lenders to enter into such an agreement,” captive finance company officials said.

“TMCC does not tolerate discrimination of any kind, even perceived or unintentional, from its employees or business partners — this principle extends to fair lending practices,” they continued.

“While TMCC respectfully disagrees with the agencies’ methodologies to determine whether industry lending practices have been discriminatory, the company shares the agencies’ commitment to ensuring that consumers can count on competitive and fair auto financing options,” the finance company went on to say. “The actions TMCC will take under this agreement are intended to further that commitment.”

The captive also discussed how the investigation unfolded; a process Toyota Motor Credit said began in 2013.

“During their review, the agencies did not contend that TMCC intentionally discriminated against its customers,” the captive said. “Accordingly, TMCC denies any wrongdoing and notes that this voluntary agreement does not include an assessment of civil money penalties. 

“As an indirect lender, TMCC has no visibility into the race or ethnicity of its customers or credit applicants, and these factors have no bearing on the company’s credit or pricing decisions,” the company added.

Foundation of investigation

Officials explained TMC’s business practice — similar to what is utilized by most captive finance companies — allows dealers discretion to vary a loan’s interest rate from the price the captive initially sets based on the borrower’s objective credit-related factors. Regulators contend dealers receive greater payments from TMC on loans that include a higher interest rate markup. 

The coordinated investigations by the department and the CFPB that preceded Tuesday settlement determined this system of subjective and unguided pricing discretion directly results in Toyota’s qualified African-American and Asian/Pacific Islander borrowers paying more than qualified non-Hispanic white borrowers.

To address this system, TMC agreed to change the way it prices its loans by limiting dealer markup to 125 basis points (or 1.25 percentage points) for contracts of 60 months or less, and to 100 basis points (or 1 percentage point) for loans greater than 60 months.

The DOJ and CFPB anticipate that TMC’s new caps on discretionary markups will substantially reduce or eliminate disparities in markups based on race or national origin.

The markup stipulations are similar to what the regulators ordered Honda Finance to implement last summer.

The settlement resolves claims by the Justice Department and the CFPB that Toyota Motor Credit discriminated by charging thousands of African-American and Asian/Pacific Islander borrowers higher interest rates than non-Hispanic white borrowers. 

The agencies claim that the captive charged borrowers higher interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk. The United States’ complaint alleges that the average African-American victim was obligated to pay more than $200 more during the term of the loan because of discrimination, and the average Asian/Pacific Islander victim was obligated to pay more than $100 more during the term of the loan because of discrimination. 

The Equal Credit Opportunity Act (ECOA) prohibits discrimination in all forms of lending, including auto financing. The captive’s settlement with the Justice Department, which is subject to court approval, was filed on Tuesday in the U.S. District Court of the Central District of California in conjunction with the Justice Department’s complaint. 

The captive resolved the CFPB’s claims by entering into a public administrative settlement.

“We are dedicated to promoting fair and equal access to credit in the auto finance marketplace,” CFPB director Richard Cordray said. “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.”

In addition to the payments of at least $19.9 million to African-American and Asian/Pacific Islander borrowers, the settlement also requires Toyota Motor Credit to improve its monitoring and compliance systems. The settlement allows the captive to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results. 

“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 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,” Gupta continued. “We commend Toyota for crafting a new compensation system that strikes an appropriate balance for dealers and consumers.”

Distribution plan

The settlement provides for an administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of the captive’s actions.

The Justice Department and the CFPB will make a public announcement and post information on their websites once more details about the compensation process become available.  Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time.

“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.”