On February 2, 2016, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) announced a joint enforcement action against indirect auto lender Toyota Motor Credit Corporation (Toyota Motor Credit) for alleged discriminatory lending practices in violation of the Equal Credit Opportunity Act (ECOA).
The CFPB and DOJ allege that Toyota Motor Credit set interest rates, or “buy rates,” that it extended to auto dealers and permitted those dealers, in their discretion, to charge consumers up to an additional 2.5 percent interest over the buy rate, which constitutes a dealer “mark-up.” The CFPB and DOJ investigation allegedly revealed that Toyota Motor Credit’s pricing policies (i) resulted in minority—African-American, Asian, and Pacific Islander—borrowers paying higher interest rates for their auto loans than non-Hispanic white borrowers as a result of the dealer markups; and (ii) injured thousands of African-American and Asian and Pacific Islander borrowers as a result of them being charged more for their auto loans than non-Hispanic white borrowers.
The CFPB consent order requires Toyota Motor Credit to:
- reduce auto dealer discretion to mark up interest rates to only 1.25 percent (rather than 2.5 percent) on auto loans with terms of 5 years of less, and 1 percent for auto loans with longer terms;
- pay $21.9 million into a settlement fund that will go to affected consumers; and
- pay to hire a settlement administrator who will contact and distribute funds to affected consumers.
The CFPB did not assess penalties against Toyota Motor Credit, because the company took proactive steps “that directly address fair lending risk by substantially reducing or eliminating discretionary pricing and compensation systems.”
CFPB’s Controversial Auto Lending Enforcement History
The CFPB has made no secret about its desire to go after indirect auto lenders for what it calls discriminatory lending practices in violation of ECOA. In fact, this enforcement action marks the fourth joint CFPB and DOJ public action related to dealer discretion in auto lending. In 2013, the CFPB and DOJ took action against Ally Financial Inc. and Ally Bank (collectively, Ally), in which Ally was accused of discriminatory lending practices as a result of its use of dealer markups. That enforcement action resulted in Ally agreeing to pay $80 million in consumer restitution and an additional $18 million in civil money penalties.
On November 24, 2015, in response to the Ally and other indirect auto lending enforcement actions taken by the CFPB, Republican members of the House of Representatives’ Financial Services Committee (the Committee) issued an initial report titled Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending, which blasts the CFPB for knowingly using unsound or weak methodology in order support its claims of discriminatory lending against indirect auto lenders.
Then, on January 20, 2016, the Committee issued a follow-up report titled Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals, which criticizes the CFPB for its actions following the Ally enforcement action. Specifically, the Committee took the CFPB to task for the approach it used in developing and implementing the settlement process for the allegedly harmed Ally consumers. Among other things, the Committee accused the CFPB of using unreasonable and unsound methods to identify minority consumers, which actually resulted in identifying not only consumers that were not harmed by Ally, but who were also not even minority.
With this latest enforcement action against Toyota Motor Credit, the CFPB appears to be doubling down on its efforts to extract a pound of flesh from indirect auto dealers. Time will likely reveal whether the CFPB utilized similarly questionable methods to compel its latest settlement as it employed in the Ally action. If so, perhaps we will see another report from Congress or perhaps greater intervention. Stay tuned.