The U.S. financing arm of Honda Motor Corp. has agreed to refund $24 million to borrowers to settle federal investigations alleging that the company discriminated against minorities by charging them higher interest rates on auto loans than white customers.
As part of the settlement announced Tuesday by regulators, American Honda Finance Corp. also committed to change the way it prices loans to limit dealer markups.
The company's pricing policies from 2011 through this summer led to allegations that thousands of black, Latino, Asian and Pacific Islander borrowers paid as much as $250 more over the life of an auto loan simply because of their race or national origin, according to the Justice Department and the Consumer Financial Protection Bureau.
“Honda’s financing practices that allowed dealerships to mark up individual loans resulted in illegal discrimination, with minority car buyers paying more for their loans than non-minority buyers with similar credit histories,” said U.S. Atty. Eileen M. Decker of the Central District of California.
Honda will contact borrowers and refund them the money they overpaid on their loans because of the higher interest rates, regulators said.
In addition, Honda agreed to spend $1 million on a financial education program on auto loans for minorities.
American Honda Finance Corp. said it had "a difference of opinion" with the agencies about the methodology they used to determine the company's auto loan pricing for minorities but "we nonetheless share a fundamental agreement in the importance of fair lending."
The company, which is the nation's ninth-largest auto lender, said it "strongly opposes any form of discrimination, and we expect our dealers to uphold this principle as well."
"We firmly believe that our lending practices have been fair and transparent," American Honda Finance said.
The consent order enacting the settlement, which was filed in federal court Tuesday, contained no finding of facts.
American Honda Finance is an indirect lender, meaning it makes most of its loans through auto dealers. Honda allows those dealers to increase the interest rate by as much as 2.25 percentage points when striking a deal with a customer.
The settlement said that "Honda engaged in a pattern or practice of discrimination on the basis of race and national origin" by permitting a higher so-called dealer mark-up on interest rates for qualified minority borrowers.
The average black borrower paid more than $250 in additional borrowing costs over the life of the loan, the Justice Department said. The average Latino paid more than $200 in additional coasts and the average Asian and Pacific Islander paid more than $150 in such costs.
Honda has agreed to limit dealer markups to 1.25 percentage point for loans of five years or less and 1 percentage point for longer loans, the Justice Department said.
The Justice Department and the consumer bureau have been focusing on discrimination in auto lending. In 2013, Ally Financial Inc. agreed to pay $98 million to settle similar allegations of discriminatory auto pricing.
Officials from both agencies commended Honda for the settlement.
"We hope that Honda's leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing," said Vanita Gupta, head of the Justice Department's civil rights division.
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