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US government is going after car dealers for charging minorities more than whites

Obsession
Future of Finance
Obsession
Future of Finance

Black, Hispanic, and Asian car buyers have been getting a raw deal, according to the US Department of Justice and the Consumer Financial Protection Bureau.

The federal agencies on Tuesday (July 14) settled a discriminatory lending suit with Honda Motor’s finance arm, alleging the car company’s auto dealers charged higher interest rates on loans to minorities than for loans issued to white customers. The CFPB also has been investigating Toyota Motor and Nissan Motor for similar practices.

Between January 2011 and December 2013, African-American customers paid an average of $250 more in interest than comparable white customers paid during the terms of their loans, because of discrimination, the Justice Department said. Likewise, Hispanics and Asians paid $200 and $150 more, respectively.

Honda determines loan rates based largely on a borrower’s creditworthiness but allows car dealerships to mark up the loan rate at the dealer’s discretion—which results in extra compensation to the dealers. Honda doesn’t require dealers to document the reasons for charging markups, and knew or had reason to know that its policy “created a substantial risk of discrimination,” the federal agencies said.

Since car dealers don’t directly collect the race or ethnicity of buyers, the government used a proxy method that analyzes the probability of race and ethnicity based on a person’s name and geographic location.

Honda, whose finance arm is the ninth-largest auto lender in the US, said it had a “difference of opinion” over how the government made its determinations. Still, it said it would pay $24 million to compensate affected customers and that it would revamp its 1,000 dealership’s loan policies because “we nonetheless share a fundamental agreement in the importance of fair lending.”

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