This week the the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) signed a consent agreement with American Honda Finance Corporation in response to discretionary auto loan pricing and compensation practices.
CFPB Director Richard Cordray commended Honda for being proactive in addressing these practices, but had Honda been monitoring more closely, they wouldn’t have found themselves in such a situation at all.
Here are some of the significant elements in the consent order:
- $24MM restitution fund for harmed consumers. No fine levied due to cooperation with the investigation.
- Honda previously allowed dealers discretion to markup buy rate up to 200 BPs for term >60 months and 225 BPs for term <60 months. New caps are 100 and 125 BPs.
- African-Americans paid 36 BPs more the Non-Hispanic Whites, Hispanics paid 28 BPs more, API 25 BPs more.
- No monitoring was being done.
- Honda can choose from one of three dealer compensation policies.
- Option 1: Contains both discretionary and non-discretionary components. The non-discretionary component is applied to all contracts while the discretionary component varies between 100 and 125 BPs depending on whether the loan term is above 60 months or not. Additionally, Honda must send ECOA notices regularly to dealers and monitor for dealer compliance with discretionary cap limits.
- Option 2: include a pre-set dealer participation rate that dealers must include in all credit offers to consumers which can be adjusted downward for documented exception situations. Monitoring of these participation rates and exceptions is required. As in option 1, Honda must send ECOA notices regularly to dealers.
- Option 3: Dealers are not allowed any discretion in setting the contract rate. Again, regular ECOA notices are required.
What can compliance officers learn from Honda’s consent order?
What’s new in this consent order are the three options for dealer compensation.
What’s not new is the fact that not monitoring for discrepancies creates problems. In Honda’s case, we once again we see the need for close attention to be paid to fair lending data.