Deceptive Auto Loans

Result: Refinancing loans & new procedures to stop racial discrimination
Year: 2006

Thompson, et al. v. WFS Financial, Inc.; Pakeman, et al. v. American Honda Finance Corporation and Herra v. Toyota Motor Credit Corporation

Lieff Cabraser and co-counsel have litigated against several of the largest automobile finance companies in the country to compensate victims of — and stop future instances of — racial discrimination in the setting of interest rates in automobile finance contracts. The litigation led to substantial changes in the way Toyota Motor Credit Corporation (“TMCC”), American Honda Finance Corporation (“American Honda”) and WFS Financial, Inc., sell automobile finance contracts, limiting the discrimination that can occur.

TMCC, American Honda and WFS Financial allow independent automobile dealers to add a discretionary markup (often several percentage points) to the objective, credit-based interest rates determined by the finance company. Plaintiffs charged that African-American and Latino customers paid more in finance charges than similarly situated non-minority customers due to the practice by TMCC, American Honda and WFS Financial of allowing dealers to increase, or “mark up,” a customer’s Annual Percentage Rate (“APR”) on contracts. The discretionary markup amounts were not based on objective credit-worthiness information, but were wholly subjective. Statistical analyses showed that the discretionary markups had a disparate impact on African American and Latino customers.

In the nationwide class action litigation against TMCC, American Honda and WFS Financial, the respective parties entered into landmark settlements for African American and Latino consumers which collectively provided:

  • Cash or credit payments of up to $400 per class member.
  • Broad refinancing programs reducing rates charged to existing African-American and Latino customers whose markups were 1% or more. These benefits were valued at $1 billion in the WFS Financial case alone.
  • New pre-approved offers of credit (that cannot be marked up) to 1.5 million African American and Latino consumers.
  • Limits on discretionary markups on new loans of 1.75% to 2.50% (depending on the length of the loan). This compression of the discretionary range substantially reduced the likelihood that any markups in the future will occur as the result of racial discrimination.
  • New disclosures on all contracts explaining that the interest rate may be negotiable.
  • Donations of $1.9 million to non-profit organizations involved in consumer education and assistance.

In approving the settlement in Thompson v. WFS Financial, the Court recognized the “innovative” and “remarkable settlement” achieved on behalf of the nationwide class. In 2006 in Herra v. Toyota Motor Credit Corporation, the Court granted final approval to a nationwide class action settlement on behalf of all African-American and Hispanic customers of TMCC who entered into retail installment contracts that were assigned to TMCC from 1999 to 2006. The monetary benefit to the class was estimated to be between $159 and $174 million.

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