LOS ANGELES (CNS) — The Justice Department and the Consumer Financial Protection Bureau has announced a settlement resolving allegations that Torrance-based Toyota Motor Credit Corp. discriminated against African American and Asian/Pacific Islander borrowers in auto lending.
Through the settlement, filed in Los Angeles federal court, Toyota agreed to limit the discretion of its dealers to charge interest rate markups on Toyota loans. The company also agreed that it will not increase the interest rates it quotes to car dealers in order to fund additional non-discretionary dealer compensation.
The settlement — revealed Tuesday, Feb, 2 — provides about $20 million in compensation for borrowers who took out loans between January 2011 and last month and paid higher markups based on the alleged discrimination.
Additionally, Toyota will pay up to $2 million to African American and Asian/Pacific Islander borrowers with markup disparities while Toyota is preparing to implement the new policies, which must be in place by August.
The company said in a statement that while it disagrees with the agencies’ “methodologies,” Toyota is committed to fairness.
“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,” according to the company.
“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 statement continued. “The actions TMCC will take under this agreement are intended to further that commitment.”
The lawsuit alleges that Toyota charged borrowers higher interest rates because of their race or national origin, and not because of creditworthiness or other objective criteria related to borrower risk.
The agencies contended that the average African-American victim was obligated to pay over $200 more during the term of the loan, and the average Asian/Pacific Islander victim was obligated to pay over $100 more, because of discrimination.
The Equal Credit Opportunity Act prohibits such discrimination in all forms of lending, including auto lending.
“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 Department of Justice’s 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 said. “We commend Toyota for crafting a new compensation system that strikes an appropriate balance for dealers and consumers.”
Toyota is known as an indirect auto lender because, rather than taking applications directly from consumers, the company makes most of its loans through car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Toyota.
It is also known as a captive auto lender because it is owned by an auto manufacturer and provides consumers with financing for the primary purpose of facilitating sales by the manufacturer and its associated franchised dealers.
Toyota’s business practice, like most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Toyota initially sets based on the borrower’s objective credit-related factors.
Dealers receive greater payments from Toyota on loans that include a higher interest rate markup.
Toyota is the nation’s largest captive auto lender, and the fifth-largest auto lender overall.
“No consumer should be forced to pay more money for a loan because of their race or national origin,” said Eileen M. Decker, the U.S. attorney in Los Angeles. “This settlement resolves our claims by providing compensation for affected consumers and seeking to ensure that future loans funded by Toyota reflect equal terms.”