Toyota Financial Services said it has no plans to change its use of dealer reserve despite scrutiny from the Consumer Financial Protection Bureau.
The bureau plans to cite Toyota Motor Credit Corp. and its Toyota Financial Services arm, American Honda Finance Corp. and Nissan Motor Acceptance Corp. as early as this month for unintentional discrimination, according to documents obtained by American Banker. Investigations into all three lenders began in 2013.
The CFPB, the report said, is expected to propose consent orders that would call for the captive finance arms to limit how much they allow dealers to increase the cost of auto loans through dealer reserve. Dealer reserve refers to dealers' practice of raising the interest rate on a vehicle loan and pocketing the additional amount as the fee for arranging the loan.
The agency's accusation of discrimination rests on a legal theory known as disparate impact, which holds that a practice can be considered discriminatory if it has an adverse effect on minority and other legally protected groups, even if it was unintentional.
The CFPB says that dealer reserve results in minority groups paying higher interest rates than other borrowers. That disparate impact amounts to illegal discrimination, the CFPB says.
The orders, if approved, would require that the captives compensate affected consumers and modify how much discretion those lenders give dealerships to exercise when increasing the cost of a loan. The captive finance arms would have to cut the dealer reserve they allow by about half of their current rates, American Banker reported, but then would not have to pay additional civil monetary penalties.
Honda allows between 200 and 225 basis points of dealer reserve, American Banker reported. The order would require that it go down to 125 basis points on contracts that are 60 months or shorter and 100 basis points for contracts longer than 60 months. American Banker reported that the changes for Toyota and Nissan had not been set by mid-June.
In December 2013, Ally Financial agreed to pay $98 million to settle similar allegations by the CFPB and the Department of Justice. Ally denies allowing discrimination and still offers dealer reserve.
The CFPB declined to comment, on the grounds that its enforcement procedures are confidential.
All three automakers confirmed that they have been in discussions with the CFPB and the Justice Department.
Toyota Financial "currently has no plans to change our pricing model," the company told Automotive News. "We look forward to continuing to work with [regulators] in pursuit of an outcome that serves the best interests of consumers while preserving auto finance providers' ability to compete."
Nissan Motor Acceptance said, "The discussions are exploratory in nature as we work to protect our customers' ability to choose financing options that fit their specific needs and to negotiate the best rates possible."