“This is a very enlightened solution,” says AutoNation’s Mike Jackson of American Honda Finance’s agreement with the CFPB.”
AutoNation Inc. CEO Mike Jackson has endorsed the settlement between the Consumer Financial Protection Bureau and American Honda Finance Corp. for preventing discrimination in auto finance, calling the agreement a “workable template” that other retailers and lenders should follow.
“I think this is a very enlightened solution,” Jackson told Automotive News. “This is a win-win-win.”
His view comes in contrast to reactions from the National Automobile Dealers Association and the American International Automobile Dealers Association, which have harshly criticized the settlement and the CFPB. Both NADA and AIADA said the agreement will hurt consumers by limiting their ability to negotiate for lower interest rates.
On July 14, Honda’s captive finance arm reached a settlement with the CFPB and the U.S. Department of Justice over lending practices that allegedly resulted in Honda’s minority customers paying higher interest rates on auto loans than other borrowers with similar credit scores. Honda Finance did not admit wrongdoing.
As part of the settlement, Honda Finance agreed to limit how much a dealership can increase the interest rate on a consumer auto loan. The increase is known as dealer reserve and serves as the dealer’s fee for arranging the loan.
Under the consent decree, dealerships using Honda Finance will be allowed to increase rates by no more than 1.25 percentage points on loans with terms of up to 60 months, and no more than 1 percentage point on loans longer than 60 months.
The agreement also leaves scope for Honda Finance to pay a dealer a nondiscretionary fee in addition to the dealer reserve. That could take the form of a flat fee, such as $100 per loan, or an additional, fixed portion of the interest rate that would be reserved for the dealer, beyond the discretionary 1.25 or 1 percent.
Jackson said a combination of the two would ensure dealers can continue to profit from arranging auto loans while achieving the CFPB’s goal of limiting the variation in the rates different consumers end up paying.
“The goal is to reduce the variability in loans without hurting the dealer economically,” Jackson said. “This [agreement] is a very viable method of doing both of those things, and I’m saying the industry should look at this as a template for moving forward.”
AutoNation limits its dealer reserve to 2.5 percentage points, Jackson said. On the loans the big retailer has arranged this year, he added, the markup has averaged 0.89 percent.