The CFPB and Department of Justice (the “Agencies”) announced recently that they have entered into a settlement with Toyota Motor Credit Corporation (TMCC) to resolve charges that TMCC engaged in unlawful discrimination in violation of the Equal Credit Opportunity Act (ECOA). The settlement includes TMCC’s agreement to change its so-called “dealer compensation policy” and pay up to $21.9 million in remediation to affected consumers. According to the CFPB press release, the CFPB did not assess a civil penalty “because of the proactive steps the company is taking that directly address fair lending by substantially reducing or eliminating discretionary pricing and compensation systems.”
The DOJ consent order includes a statement by TMCC in which it asserts that “it has treated all of its customers fairly and without regard to impermissible factors such as race or national origin” and entered into the settlement “solely for the purpose of avoiding contested litigation with the [DOJ] and instead to devote its resources to providing fair and industry-leading services to its customers.” In another statement issued after the settlement was announced, TMCC stated that it “respectfully disagrees with the agencies’ methodologies to determine whether industry lending practices have been discriminatory.”
The settlement arises out of a joint CFPB and DOJ investigation that, as described in the CFPB consent order targeted TMCC’s alleged “policy and practice that allows dealers to mark up a consumer’s [contract] rate above [TMCC’s] established buy rate” and then compensate dealers “from the increased [finance charge] revenue to be derived from the dealer markup.” The CFPB claimed that the so-called dealer “markups” were “based on dealer discretion” and “separate from, and not controlled by, the adjustments to creditworthiness and other objective criteria related to [buyer] risk in setting the buy rate.”
Based on a portfolio-level analysis of the dealer “markups” on “non-subvented” retail installment contracts (i.e., contracts not subsidized by the auto manufacturer) purchased by TMCC in 2011 to 2013, using the “Bayesian Improved Surname Geocoding” proxy methodology, the Agencies claimed that African-American and Asian and/or Pacific Islander buyers were charged higher dealer “markups” than similarly-situated white buyers. According to the Agencies, TMCC’s dealer compensation policy violated the ECOA because it had a disparate impact on African American and Asian and/or Pacific Islander buyers. In its complaint filed in the United States District Court for the Central District of California, the DOJ alleged that TMCC’s “policy“ was “not justified by legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact on” such minority buyers.
Under the terms of the substantially similar DOJ and CFPB consent orders, TMCC must implement one of three dealer compensation policies: Option One provides substantially lower limits on dealer discretion in setting the contract rate; Option Two provides for the establishment of a standard dealer participation rate (within the substantially lower rate spread limits) with downward deviations pursuant to authorized exceptions; and Option Three allows no dealer discretion in setting contract rates. The settlement includes additional requirements regarding TMCC’s maintenance of general compliance management systems, sending annual notices to dealers regarding ECOA compliance, monitoring of dealers for compliance with the limits on dealer discretion in setting the contract rate, and submission of portfolio-level data to the Agencies.
The settlement also includes monetary relief consisting of a $19.9 million settlement fund to provide redress for affected consumers who allegedly were “overcharged” when they entered into retail installment sale contracts from January 1, 2011 through the Effective Date. (The Effective Date is the date on which the CFPB Consent Order is issued or on which the DOJ Consent Order is approved and entered by the district court.). TMCC can be required, however, to deposit up to an additional $2 million into the settlement fund based upon a determination by the Agencies as to need for additional redress attributable to the period from the Effective Date until the date by which TMCC has fully implemented its new dealer compensation policy. This additional redress apparently relates to affected consumers who enter into contracts during the pre-implementation window period after the Effective Date.
While the TMCC settlement closely tracks the terms of the Agencies’ two most recent settlements of this nature, there are some differences. Two of these differences are particularly noteworthy.
First, although it is not provided for in either the TMCC consent orders, the CFPB’s and DOJ’s press releases issued by each of the Agencies stated that TMCC “has further committed that it will not fund any additional nondiscretionary component of dealer compensation by increasing its posted risk-based buy rates.”
Second, as in prior consent orders and subject to certain compliance with documentation requirements, a footnote in the TMCC consent orders provides that TMCC is not precluded from using a “competitive modifier” to reduce its risk-based buy rate “based on competitive offers (e.g., a valid, dealer documented, competitive offer from another financing source) when it is necessary to retain the customer’s transaction.” Prior consent orders have required, however, that the respondents’ policies relating to a “competitive modifier” of a risk-based buy rate shall “eliminate Dealer Discretion in the transaction.” Instead of imposing a prohibition of this nature, the relevant footnote in the TMCC consent orders concludes with the following sentence: “Respondent’s dealer compensation policies shall not vary when Respondent reduces a risk-based buy rate; dealers may retain the discretion to mark up the modified buy rate, subject to the caps set forth in subparagraph (a) of this Option, ¶ 25(a).”