Sitting across from “Larry,” the credit manager at a local car dealership earlier this week, I thought, “OK, I get it now. I understand why the CFPB is so interested in auto dealers.”
In the car buying process, everything is negotiable, including the terms of credit. And, while Larry typed away and we sat in his office, I realized he had the power to negotiate my terms of credit. Now, I felt Larry and his dealership treated me fairly and with respect; but, according to the CFPB, that is not the case with all car dealerships.
Over the last year, the CFPB has focused closely on the auto finance industry (which we have discussed here). The agency's primary concern is that discretionary auto lending leads to discrimination.
Auto credit is the third-largest credit industry (behind mortgage credit and student loans), so it is of particular concern for the CFPB.
In early February, the CFPB and DOJ jointly announced another auto credit discrimination settlement, this time with Toyota Motor Credit Corporation, one of the largest indirect auto lenders in the country. Toyota would set a “buy rate” for consumers based on credit history. The dealer could then charge a higher rate called a “dealer markup.” The CFPB and DOJ found this resulted in minority borrowers paying more for credit—specifically, African-American borrowers paid, on average, $200 more than non-minority borrowers, and Asian and Pacific Islander borrowers paid $100 more.
This is a violation of the Equal Credit Opportunity Act, the primary federal credit discrimination law. As a result, Toyota Motor Credit agreed to change its pricing to reduce dealer discretion and pay $21.9 million in restitution to minority borrowers.
Of note, the CFPB's press release explains, “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.” Liability for discrimination based on outcome rather than intent – or disparate impact – is becoming more common, especially in light of a recent U.S. Supreme Court decision (which we discussed here).
There are two key takeaways from this recent action against Toyota Motor Credit. First, discretionary auto lending continues to be at the top of the CFPB's priority list. Second, if a credit policy of any lender, not just an auto lender, results in a discriminatory effect, even without intent, it could be illegal.