WASHINGTON, D.C. — The three-year standoff between Toyota Motor Credit Corp. (TMCC), the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) regarding the captive’s dealer compensation policies has ended, with the finance source voluntarily agreeing to lower its markup caps and pay up to $21.9 million in restitution to minority borrowers the two regulars allege paid higher interest rates than white borrowers.
In a statement released on its website, TMCC denied any wrongdoing and noted that its voluntary agreement does not include an assessment of a civil penalty. It also said it “respectfully disagrees” with the agencies’ methodology for determining disparate impact discrimination, adding that it has no visibility into the race or ethnicity of credit applicants.
“TMCC determined that a voluntary agreement was the preferred resolution of the agencies’ review, because it helps preserve consumer financing options while fairly compensating its dealer partners and upholding its commitment to fair lending practices,” the statement read. “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 actions TMCC will take under this agreement are intended to further that commitment.”
The captive finance company will pay $19.9 million into a settlement fund that will go to affected African-American and Asian and Pacific Islanders who financed their vehicle purchases with TMCC between January 2011 and Feb. 2, 2016. Toyota Motor Credit will also pay up to an additional $2 million into the fund to compensate any affected African-American and Asian and Pacific Islander borrowers in the time between Feb. 2, 2016, and when the captive implements its pricing and compensation structure. The captive will also pay to hire a settlement administrator to distribute funds to affected consumers.
The term of the agreement is set for three years, but can be reduced to two years if certain conditions are met, the captive said on its website.
As for its new compensation structure, TMCC will lower its dealer markup caps to 1.25% above the buy rate for auto loans with terms of five years or less, and 1% for auto loans with longer terms. The captive, according to the agreement, also has the option to move to nondiscretionary dealer compensation.
The bureau and the DOJ, whose activities in the auto finance arena have come under fire by Congressional Republicans in recent months, found that TMCC’s dealer markup policy resulted in thousands of African-American borrowers being charged, on average, more than $200 more for their auto loans that white borrowers. The agencies also alleged that thousands of Asian and Pacific Islander borrowers were charged, on average, more than $100 more than white borrowers.
“The investigation did not find that Toyota Motor Credit intentionally discriminated against its customers, but rather that its discretionary pricing and compensation policies resulted in discriminatory outcomes,” the bureau stated in its press release announcing the agreement with TMCC.
The bureau’s investigation into TMCC’s dealer compensation policy began in April 2013, about a month after the bureau released its controversial guidance on dealer participation — which claimed policies that allow dealers to mark up interest rates on retail installment sales contracts result in minorities paying higher rates. The first finance source the CFPB and DOJ took action against was Ally Financial and Ally Bank, which resulted in the $98 million settlement announced in December 2013.
In late 2014, the CFPB and the DOJ began notifying lenders — including TMCC and American Honda Finance — that they could face enforcement actions related to their dealer compensation policies. In July 2015, American Banker reported that it has acquired the bureau’s proposed consent orders, noting that the regulator was expected to cite three major auto lenders for allegedly allowing their dealer partners to charge higher interest rates on auto loans to minority borrowers.
The new source noted, however, that the regulators offered the three finance sources the chance to forgo civil penalties in exchange for cutting the price discretion they offer dealers by roughly half. A spokesperson for Toyota’s captive told F&I and Showroom at the time that cutting discretion was unlikely to happen.
“Toyota Financial Services currently has no plans to change our pricing model,” the spokesperson told F&I and Showroom for its July 1 report on the American Banker article. Fourteen days later, the CFPB and the DOJ announced that Honda Finance Corp. agreed to a $24 million settlement. As part of the agreement, the captive agreed to lower its markup caps to 1.25% on auto loans with terms of five years or less, and 1% for auto loans with longer terms.
Fifth Third Bank followed suit last September after being pressured by the CFPB to also lower its caps. Rumors, however, began to spread that TMCC wasn’t going to budge.
This past November at the Texas Compliance Summit, an event hosted in Austin, Texas, by F&I and Showroom publisher David Gesualdo, TMCC’s rumored battle with the regulators came up during a panel discussion that included Karen Klees, a certified consumer credit compliance specialist for EFG Companies. She told the audience that the captive was rumored to be preparing to take its fight to court.
“From what I can see, it appears that Toyota Motor Credit did a very thorough job in preparing for CFPB oversight,” she said in email issued to F&I and Showroom this morning. “I can see where Toyota would be taken back by the CFPB’s findings considering the efforts they’ve put forth.”
A TMCC spokesperson neither denied nor confirmed the company's standoff with the two regulators.
The agreement between TMCC and the two regulators comes more than three months after Republican members of the House Financial Services Committee issued a critical report on the CFPB’s attack on dealer participation. The report, released on Nov. 24, charged that the bureau pursued its investigations and enforcement actions against auto finance sources despite internal bureau documents showing that the statistical method for identifying disparate impact discrimination was “prone to significant error.”
The report was also issued the same month that the House of Representatives passed H.R. 1737, legislation that would repeal the bureau’s guidance on dealer participation and add a few more steps to its guidance-writing activities. The bill faces tough opposition in the U.S. Senate, and the Obama Administration has said it strongly opposes the legislation as well.
The American Financial Services Association, which commissioned a study in 2014 that examined the proxy methodology used by the CFPB and found significant bias and high error rates, said the voluntary agreement between TMCC and the two regulators represents some progress.
“However, we continue to advocate for a universal, market-based solution to dealer compensation rather than the use of one-off enforcement actions, based on flawed methodologies, to address potential disparate impact,” the association said in a statement issued to F&I and Showroom magazine. “The American Financial Services Association stands committed to working with the CFPB to resolve this issue and reach a solution that is in the best interest of millions of U.S. consumers.”