LOS ANGELES—Honda Motor Co. reached a settlement Tuesday to resolve allegations that the company discriminated against minority car buyers by marking up interest rates on loans, a practice industry experts describe as common because of the discretion given to individual dealerships.
Honda’s settlement with the U.S. Department of Justice is subject to court approval and was filed in federal court in Los Angeles. Honda’s U.S. operation is based in nearby Torrance, California.
The Justice Department and the Consumer Financial Protection Bureau accused Honda dealers of charging higher interest rates to thousands of black, Hispanic, Asian, and Pacific Islander customers than they did to white car buyers. Those minority customers paid an average of between $150 and $250 more during the terms of their loans, the Justice Department said.
Honda said in a statement that it “strongly opposes any form of discrimination, and we expect our dealers to uphold this principle, as well.”
“We firmly believe that our lending practices have been fair and transparent,” the company said.
Under the settlement, Honda is agreeing to pay $24 million to past victims of discriminatory lending and cap the interest-rate markups that dealers can charge to between 1 and 1.25 percentage points, depending on the length of the loan.
The Justice Department called the settlement groundbreaking, specifically referring to the markup caps.
“We believe that Honda’s new compensation system balances fair compensation for dealers and fair lending for consumers,” said Vanita Gupta, head of the Justice Department’s civil rights division. “We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing.”
Like most auto lenders, Honda makes most of its loans through car dealers that help customers pay for their vehicles by submitting their loan applications to Honda. Honda dealers had been able to raise interest rates at their discretion and were able to get bigger payments from Honda for charging more, the Justice Department said.
Ira Rheingold, executive director of the Washington, D.C.-based National Association of Consumer Advocates, said the practice is rampant across the industry.
“It’s a horrible process,” Rheingold said. “As long as a car dealer arranges financing, and there’s no control over what the car dealer can charge, there’s going to be abuse and there’s going to be discrimination, because they’re going to look you over and say, ‘I can get away with charging you more.'”
There’s no doubt that other auto lenders will take note of Honda’s settlement, particularly regarding the markup caps, Rheingold said.
“The auto dealers will not be happy,” he said. “It will hurt their bottom line to the extent that their bottom line has been helped by practices that should not have happened in the first place.”