To resolve charges by the Consumer Federal Protection Bureau (CFPB) and the Department of Justice (DOJ) that it engaged in unlawful discrimination in violation of the Equal Credit Opportunity Act (ECOA), American Honda Finance Corporation (AHFC) has agreed to change its auto dealer compensation policy, pay $24 million in restitution, and distribute $1 million towards the administration and operation of a consumer financial education program.
It is noteworthy, however, that the settlement does not include payment of any monetary penalties by AHFC, which perhaps reflects statements in the DOJ’s and CFPB’s press releases praising AHFC for its industry “leadership” in agreeing to change its policy.
The settlement arises out of a joint CFPB and DOJ investigation that, as described in the DOJ complaint filed in a California federal court and the CFPB consent order, targeted AHFC’s alleged “policy” giving dealers “discretion to mark up a consumer’s interest rate above [AHFC’s] established risk-based buy rate.” According to the DOJ and CFPB, AHFC compensated dealers “from the increased interest revenue to be derived from the dealer markup.” (The DOJ and CFPB use the term “dealer markup” to refer to “the difference between the buy rate and the consumer’s interest rate on the retail installment contract” purchased by AHFC from a dealer. The DOJ and CFPB claimed that the dealer markups “are separate from, and not controlled by, the adjustments for creditworthiness or other objective criteria related to borrower risk that are already reflected in the buy rate.”
Based on their analysis of the dealer markups on “non-subvented” retail installment contracts (i.e., contracts not subsidized by the auto manufacturer) purchased by AHFC in 2011 to 2013 using a proxy methodology known as the “Bayesian Improved Surname Geocoding Method,” the DOJ and CFPB claimed that African-American, Hispanic, and Asian and/or Pacific Islander borrowers were charged more in dealer markups than similarly-situated white borrowers.
In particular, according to the DOJ complaint:
African Americans were charged approximately 36 basis points more, obligating them to pay, on average, $250 more in interest;
Hispanics were charged approximately 28 basis points more, obligating them to pay, on average, approximately $200 more in interest; and
Asian and/or Pacific Islanders were charged approximately 25 basis points more, obligating them to pay, on average, approximately $150 more in interest.
According to the agencies, because of this disparate impact on such minority borrowers, AHFC’s dealer compensation policy violated the ECOA. In its complaint, the DOJ alleged that AHFC’s policy was “not justified by legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact on [such minority] borrowers.”
Under the terms of the substantially similar DOJ and CFPB consent orders, AHFC must implement a dealer compensation policy that conforms to one of the following three options:
Under “Option One,” AHFC must limit dealer markups to 125 basis points on retail installment contracts with terms of 60 months or less and 100 basis points for contracts with longer terms. (According to the CFPB consent order, from January 1, 2011 to July 1, 2015, AHFC limited dealer markups for contracts with such terms to, respectively, 225 basis points and 200 basis points.)
Under “Option Two,” AHFC must adhere to the same dealer markup limits but must also establish a standard pre-set markup that does not exceed such limits and is included by a dealer in all credit offers. AHFC can allow a dealer to charge a single, pre-set markup that is lower than the standard pre-set markup for particular loan types and/or channels or for all contracts purchased from a particular dealer. It can also allow a dealer to charge a markup that is lower than the standard markup “based on a lawful exception” allowed under fair lending policies and procedures that AHFC must establish to use Option Two. In addition to defining the circumstances allowing lower markups, such policies and procedures must require the documentation of exceptions on “a loan-by-loan” basis and retention of documentation.
Under “Option Three,” AHFC must prohibit any dealer markup.
The consent orders allow AHFC to use Option Three for some dealers while using Options One or Two for other dealers, provided “all loans purchased from a particular dealer are compensated using only” one of the three options. All three options require AHFC to also maintain general compliance management systems that are reasonably designed to assure ECOA (and other federal consumer financial law) compliance and, with respect to monitoring ECOA compliance, include giving regular notice to dealers explaining the ECOA, AHFC’s ECOA compliance expectations, and the dealer’s obligation to price contracts in a non-discriminatory manner.
Under Options One and Two, such systems must also include monitoring dealers for compliance with the markup limits, and AHFC must submit data upon request to the CFPB and DOJ semiannually for analysis and monitoring. In addition, under Option Two, AHFC must maintain a compliance management system to monitor dealer compliance with setting markups at the standard rate and making exceptions to such rate in accordance with AHFC’s policies and procedures. Such system must include “[a]ppropriate corrective action for a dealer’s noncompliance with [AHFC’s] exceptions policies and procedures, culminating in the restriction or elimination of dealers’ ability to exercise discretion in setting a consumer’s contract rate or exclusion of dealers from future transactions with [AHFC].”
The settlement also includes monetary relief consisting of AHFC’s payment of $1 million for consumer financial education and creation of a $24 million settlement fund to provide redress for consumers who entered into non-subvented retail installment contracts with AHFC from January 1, 2011, through July 1, 2015, and were “overcharged.”
The DOJ’s consent order contains a statement by AHFC in which the company “asserts that throughout the period of time at issue in this proceeding and to the present, it has treated all customers fairly and without regard to impermissible factors such as race or national origin.” AHFC also states that it “has not been informed that the United States contends [AHFC] or any of its employees engaged in any intentional discrimination or disparate treatment of minorities.”
A sharply divided U.S. Supreme Court recently ruled in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. that disparate impact claims are cognizable under the Fair Housing Act. The majority opinion recognized, however, the need for limitations on disparate impact liability to protect potential defendants against abusive disparate impact claims, including a robust causality requirement to ensure that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact. Most significantly, Inclusive Communities does not resolve the question of whether disparate impact claims are cognizable under the ECOA.