PhotoToyota Motor Credit has agreed to pay $21.9 million in restitution and change its policies to make it harder for dealers to mark up interest rates for minority car buyers.

“We are dedicated to promoting fair and equal access to credit in the auto finance marketplace,” said Richard Cordray, director of the Consumer Financial Protection Bureau, which announced the settlement. “Toyota Motor Credit is among the largest indirect auto lenders, and we commend its industry leadership in shifting to reduced discretion to address the significant fair lending risks.”

The problem, simply put, is that dealers have had too much latitude to play games with interest rates and have often gouged minority consumers, charging them higher interest rates even when they had good credit records.

Big bucks are at stake. Auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans.

“No consumer should be forced to pay more money for a loan because of their race or national origin,” said U.S. Attorney Eileen M. Decker of the Central District of California. “This settlement resolves our claims by providing compensation for affected consumers and seeking to ensure that future loans funded by Toyota reflect equal terms.”

Pay restitution

The $21.9 million will be used to pay restitution to thousands of African-American, Asian, and Pacific Islander borrowers who paid higher interest rates than white borrowers for their auto loans.

The Toyota settlement is a step in the right direction but doesn't solve the problem, said Chris Kukla of the Center for Responsible Lending.

"The terms of the settlement continue to move in the right direction. However, dealer discretion to mark up interest rates remains an unfair and hidden practice with continued potential for discrimination," Kukla said. "The only effective way to completely eliminate the discriminatory impact and the unfairness of hidden dealer interest rate markups is to end the practice altogether."

"The recent news that Ally paid an additional $38 million in restitution to compensate borrowers harmed after Ally’s settlement with the Consumer Financial Protection Bureau and the Department of Justice shows that the issue of discrimination due to car dealer interest rate markup is real and needs to end," Kukla said.

How it works

As an indirect auto lender, Toyota Motor Credit sets interest rates, or “buy rates,” for consumers based on credit scores and other risk criteria. Those rates are conveyed to auto dealers.

Indirect auto lenders like Toyota Motor Credit then allow auto dealers to charge a higher interest rate when they finalize the deal with the consumer. This is typically called “dealer markup.” Markups can generate compensation for dealers while giving them the discretion to charge consumers different rates regardless of consumer creditworthiness.

Over the time period under review, Toyota Motor Credit permitted dealers to mark up consumers’ interest rates as much as 2.5 percent.

The Toyota settlement is the latest in a series. Earlier settlements with Ally Financial and Honda Finance generated $122 million in penalties and restitution.


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