The Consumer Financial Protection Bureau and the Department of Justice have been fighting for our right to fair financing, and you might be surprised by an area of recent focus. Since 2013, the agencies have been investigating indirect lenders associated with car companies and dealers, and they found their financing policies have a discriminatory impact on non-white borrowers.
The most recent target of investigation, reports JD Supra, is Toyota Motor Credit. The company this year entered into an enforcement order with the agencies — a sort of plea deal — to address the issue. It should be noted that the agencies did not find discriminatory lending was deliberate, yet it ended up having a discriminatory impact.
As a result of an arrangement between car companies and indirect lenders, it turns out that non-white borrowers ended up paying higher interest rates on loans for cars regardless of their creditworthiness. The deal between lenders and the car companies is that the dealer can mark up the interest rate on a loan as a kind of benefit of having originated the loan by selling the car.
Somehow, this policy ended up negatively impacting non-white borrowers disproportionately, and it wasn’t because their credit was worse than white borrowers. Although the intent was not deliberate the impact is discriminatory, and the agencies in 2013 assessed nearly $100 million in remediation and penalties against car companies and indirect lenders based on the discriminatory impact of these markup policies.
Paying for the Markup
In a bulletin issued in 2013, the CFPB advised indirect lenders that these markup policies which give dealers discretion to increase contract interest rates “create a risk of pricing disparities on prohibited bases such as race or national origin.” It warned then that it would pursue lenders for Equal Credit Opportunity Act violations and has made good on its promise, with continued efforts to ferret out violators of the ECOA.
Toyota Motor Company was the most recent target and earlier this year it was ordered to change its dealer pricing and compensation policies to reduce dealer discretion in setting interest rates. The company was ordered to pay restitution of up to $21.9 million to minority borrowers whom the agencies found paid higher interest rates without regard to creditworthiness as a result of dealer markups permitted by TMC. This brings to $162 million the total remediation ordered in the four orders entered against indirect lenders since 2013.
As this matter shows, discrimination is often a very subtle and insidious force. It is not always evident how it manifests and yet, it continues to manifest.