Toyota Unit Enters $21.9 Million Settlement Over Alleged Auto Loan Racial Bias

WASHINGTON—Federal regulators have reached a $21.9 million settlement with Toyota Motor Corp.'s U.S. financing unit over policies that allegedly overcharged minority borrowers for auto loans.

It is the fourth settlement that regulators have drawn from auto lenders over the past two years about suspected racial discrimination, part of an expanding federal scrutiny of that issue.

Under the agreement with the Consumer Financial Protection Bureau and the Justice Department announced Tuesday, Toyota Motor Credit Corp. will also change its pricing and compensation system to reduce the discretion of dealers to charge extra interest for certain loans, and will cut their compensation associated with such action, the regulators said.

In a statement, the Toyota unit denied any wrongdoing and noted that the voluntary agreement didn't include an assessment of civil money penalties. Instead, the settlement will go into a fund reimbursing borrowers who allegedly faced discrimination.

In a separate high-profile auto lending discrimination case, Ally Financial Inc. on Jan. 29 mailed checks worth a combined $80 million to 235,000 customers allegedly harmed by its pricing practices. In that case, the CFPB's methodology for determining racial bias was questioned by companies and lawmakers.

Last year, American Honda Finance Corp. and Fifth Third Bancorp signed settlements similar to Toyota's.

"As an indirect lender, TMCC has no visibility into the race or ethnicity of its customers or credit applicants, and these factors have no bearing on the company's credit or pricing decisions," the company said in a news release. The company added that it "respectfully disagrees" with the methodologies used by the federal agencies to determine whether the industry's practices have been discriminatory.

But the CFPB asserted that, even if Toyota wasn't intentionally discriminating, it has a responsibility to reduce incentives that could lead to that outcome. "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," CFPB Director Richard Cordray said in a statement.

Under the latest agreement, Toyota will pay up to $21.9 million into a settlement fund that will go to affected African-American and Asian and Pacific Island borrowers whose auto loans were financed by the company between January 2011 and the time of the implementation of the new pricing structure.

The agreement won't fully eliminate the dealer's ability to mark up interest rates for some loans. Instead, dealers now must limit the extra charges to up to 1.25 percentage points for loans with terms of five years or less, down from 2.5% previously.

Write to Yuka Hayashi at [e-mail]

(END) Dow Jones Newswires

February 02, 2016 18:55 ET (23:55 GMT)

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