The Department of Justice and the Consumer Financial Protection Bureau (CFPB) announced today a settlement to resolve allegations that Toyota Motor Credit Corporation (Toyota) engaged in a pattern or practice of discrimination against African-American and Asian/Pacific Islander borrowers in auto lending. Toyota, based in Torrance, California, is the nation’s largest captive auto lender, and the fifth largest auto lender overall.
Through the settlement, Toyota agrees to limit significantly the discretion of car dealers to charge interest rate markups on Toyota loans. Notably, Toyota has also committed that it will not increase the interest rates it quotes to car dealers in order to fund additional nondiscretionary dealer compensation implemented as part of the settlement. The settlement also provides $19.9 million in compensation for borrowers who took out loans between January 2011 and January 2016 and paid higher markup based on the alleged discrimination. Additionally, Toyota will pay up to $2 million to African-American and Asian/Pacific Islander borrowers with markup disparities while Toyota is preparing to implement the new policies. The new policies must be in place by August 2016.
“Toyota’s reforms will level the playing field to ensure that all eligible borrowers – regardless of their race or national origin – can sign auto loans with fair terms and reasonable interest rates,” said Principal Deputy Assistant Attorney General Vanita Gupta, head of the Civil Rights Division. “While dealerships deserve fair compensation for the valuable customer service they provide, federal law protects consumers against higher price markups simply because of what they look like or where they come from. We commend Toyota for crafting a new compensation system that strikes an appropriate balance for dealers and consumers.”
Toyota is known as an indirect auto lender because, rather than taking applications directly from consumers, the company makes most of its loans through car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Toyota. It is also a captive auto lender because it is owned by an auto manufacturer and provides consumers with financing for the primary purpose of facilitating sales by the manufacturer and its associated franchised dealers. Toyota’s business practice, like most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Toyota initially sets based on the borrower’s objective credit-related factors. Dealers receive greater payments from Toyota on loans that include a higher interest rate markup. The coordinated investigations by the department and the CFPB that preceded today’s settlement determined this system of subjective and unguided pricing discretion directly results in Toyota’s qualified African-American and Asian/Pacific Islander borrowers paying more than qualified non-Hispanic white borrowers.
To address this system, Toyota has agreed in today’s settlement to change the way it prices its loans by limiting dealer markup to 125 basis points (or 1.25 percentage points) for loans of 60 months or less, and to 100 basis points (or 1 percentage point) for loans greater than 60 months. The department and CFPB anticipate that Toyota’s new caps on discretionary markups will substantially reduce or eliminate disparities in markups based on race or national origin.
The settlement resolves claims by the department and the CFPB that Toyota discriminated by charging thousands of African-American and Asian/Pacific Islander borrowers higher interest rates than non-Hispanic white borrowers. The agencies claim that Toyota charged borrowers higher interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk. The United States’ complaint alleges that the average African-American victim was obligated to pay over $200 more during the term of the loan because of discrimination, and the average Asian/Pacific Islander victim was obligated to pay over $100 more during the term of the loan because of discrimination. The Equal Credit Opportunity Act (ECOA) prohibits such discrimination in all forms of lending, including auto lending. Toyota’s settlement with the Justice Department, which is subject to court approval, was filed today in the U.S. District Court of the Central District of California in conjunction with the Justice Department’s complaint. Toyota resolved the CFPB’s claims by entering into a public administrative settlement.
“We are dedicated to promoting fair and equal access to credit in the auto finance marketplace,” said Director Richard Cordray of CFPB. “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.”
“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.”
In addition to the payments of at least $19.9 million to African-American and Asian/Pacific Islander borrowers, the settlement also requires Toyota to improve its monitoring and compliance systems. The settlement allows Toyota to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results. The department commends Toyota for working cooperatively to reach an appropriate resolution of this case.
The settlement provides for an administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of Toyota’s discrimination. The department and the CFPB will make a public announcement and post information on their websites once more details about the compensation process become available. Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time.
The Civil Rights Division, the U.S. Attorney’s Office of the Central District of California and the CFPB are members of the Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ Offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information about the task force, please visit www.StopFraud.gov.
The Justice Department’s enforcement of fair lending laws and the Servicemembers Civil Relief Act (SCRA) is conducted by the Housing and Civil Enforcement Section in the Civil Rights Division. Since 2010, the Civil Rights Division has provided approximately $1.4 billion in monetary relief for individual borrowers and impacted communities through its enforcement of the Fair Housing Act, ECOA and the SCRA. The Attorney General’s annual reports to Congress regarding ECOA highlight the department’s accomplishments in fair lending and are available at www.justice.gov/crt/publications.
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