Flat Fees and Parallels: 2 Takeaways From Toyota’s Settlement Case

canstockphoto0192557If you work in auto finance, you’ve heard by now that Toyota Motor Credit Corp. (TMCC) reached a “voluntary” resolution with the Consumer Financial Protection Bureau and the Department of Justice on Tuesday, to address the alleged discriminatory practices in its loan pricing.

According to the resolution, TMCC will invest $22 million to be distributed to affected borrowers, as well as cap its dealer participation markup to 125 for loans up to 60 months, and 100 basis points for loans with longer terms, the company said.

Looking at the TMCC case, there are two major takeaways we thought are worth highlighting.

           1. Flat Fees Off the CFPB’s Agenda?

The terms of the settlement signal that the bureau is now willing to accept a form of dealer participation program, attorney Kenneth Rojc,  managing partner of Nisen & Elliot LLC’s automotive finance group, told Auto Finance News.

“The settlement is very important for the auto finance industry, both for lenders and dealers,” he said. “It seems that the CFPB has backed off of its initial goal of  moving the entire industry to a flat-fee structure.”

Despite the CFPB’s recommendation of moving to flat fees, notably only BB&T Dealer Financial Services (June 2015) and BMO Harris Bank (April 2014) have made the switch.

           2. TMCC Settlement is More a Honda, than an Ally.

Even though all three cases were brought on to address alleged discriminatory practices in loan pricing, the structure and terms of the TMCC case are similar to those of American Honda Motor Corp.  (AHMC) rather than Ally Financial’s.

Both captives capped their dealer participation markup – 125 for loans up to 60 months, and 100 basis points for loans with longer terms – while Ally Financial’s markup rates did not change.  Ally was, however, required to implement a compliance program to monitor dealer markup and prevent future discrimination, according to the CFPB documents.

“Until Ally’s compliance program effectively eliminates disparities, Ally will pay harmed consumers each year under the order,” the bureau wrote. “In the alternative, Ally can move away from dealer markups to a non-discretionary dealer compensation structure, which would eliminate its obligation to monitor the fair lending risk of ongoing dealer markups.”

Toyota didn’t have that requirement.

“The structure of the two settlement cases [TMCC and AHMC] are very similar, but the major distinction is that in Toyota’s case there was no alleged discrimination to Hispanic borrowers,” only to African-American and Asian and Pacific Islander borrowers, Rojc added.

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