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The Department of Justice and the Consumer Financial Protection Bureau today announced a groundbreaking settlement with Honda Finance Corporation (Honda) to resolve claims that it engaged in a pattern or practice of discrimination against thousands of African-American, Hispanic, and Asian/Pacific Islander auto loan borrowers. The settlement requires Honda to change its business practices to reduce the likelihood of future discrimination. It also provides $24 million in compensation to alleged victims of past discrimination.
In its role as an indirect auto lender, Honda sets a risk-based interest rate for each new or used car loan and then conveys that rate to car dealers to help them sell the loans to consumers. Car dealers are then permitted to mark up that interest rate, which is called the dealer buy rate, to generate additional compensation and profit. The United States complaint alleges that these markups violated the Equal Credit Opportunity Act by resulting in higher dealer interest rates for certain borrowers, including many minorities.
The settlement requires Honda to limit its dealer markup to no more than 125 basis points on loans up to 60 months in duration and 100 basis points on longer-term loans. It also requires the company to limit its overall dealer markup as a percentage of the total loan amount and to provide consumers with written disclosures about their dealer buy rate before they sign their auto financing contract. The company will also have to develop a comprehensive plan to detect and respond to any instances of potential discrimination. The department and CFPB will work with an administrator to locate and distribute payments of compensation to affected borrowers.
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