The FTC’s complaint against Bronx Honda alleges the company jacked up what consumers had to pay by fabricating fees, inflating charges, and sneaking in stealth add-ons. The lawsuit also alleges the defendants discriminated against African-American and Hispanic consumers by charging them higher financing markups and fees, in violation of the Equal Credit Opportunity Act and Reg B. The $1.5 million proposed settlement, which requires the company to implement a fair lending program that safeguards against discrimination, should serve as a reminder to other businesses that may be overdue for an ECOA compliance check.
The FTC says the company’s deceptive advertising claims were just the start. According to the complaint, Bronx Honda advertised some vehicles with a “Was” price and a lower “Now” price. But in many instances, sales reps told consumers the “Now” price was in error and they’d have to pay more. In addition, the FTC says in numerous instances, the defendants falsely told consumers they had to pay bogus extra fees to buy or finance “Certified Pre-Owned Hondas.” In fact, Certified Pre-Owned Hondas are covered by the manufacturer’s seven-year, 100,000-mile warranty and American Honda Motor Corporation doesn’t allow dealerships to charge a separate fee for the warranty. The FTC says Bronx Honda also charged some consumers thousands more for “dealer prep,” “shop,” or “reconditioning” fees for Certified Pre-Owned Hondas, even though according to American Honda, that designation means the dealership has already “recondition[ed] any component that does not meet [the manufacturer’s] standards.”
According to the complaint, Bronx Honda also overcharged consumers by dinging them for as much as $695 in documentation fees, an amount limited by New York law to no more than $75. In addition, the lawsuit alleges the defendants often gave consumers one figure for the agreed-upon total, but then inflated the price without the buyer’s knowledge in other documents – a practice Bronx Honda employees called “air money.”
To cite just one example from the complaint, the FTC said Bronx Honda advertised a 2014 Certified Pre-Owned Honda CR-V Touring AWD for $28,354, but then piled on – among other things – a $1,995 “certification fee,” a $350 document processing fee, a $493 prep fee, and a $795 shop fee, purportedly for “brakes” and “repairs,” even though repairs to brakes and other components are performed as part of the manufacturer’s certification. You’ll also want to read the complaint to see how the FTC alleges the defendants violated the Truth in Lending Act and Reg Z by failing to clearly disclose required credit information and the annual percentage rate.
Moving to the ECOA allegations, the FTC says Bronx Honda singled out African-American and Hispanic consumers for particularly pernicious practices by directing its employees to charge them higher interest rates and inflated fees. For example, the defendants arranged financing through third-party financing companies that provided Bronx Honda with a specific “buy rate,” a risk-based finance charge that reflected the interest rate at which the entity would finance a retail installment contract from the dealer. But according to the FTC, Bronx Honda had a discretionary pricing policy that allowed sales people to mark up interest rates and fees for consumers who financed their vehicles. Unlike the buy rate, that markup wasn’t based on the underwriting risk or credit characteristics of the applicant. Combine that practice with Bronx Honda’s alleged instructions to sales personnel to charge African-American and Hispanic consumers higher markups and additional fees – conduct the FTC says the defendants told their employees not to try with non-Hispanic white customers – and you’ll see why the complaint charges the defendants with violating the ECOA.
What did that mean in dollars and cents for African-American and Hispanic consumers? According to the complaint, among thousands of consumers who received financing through Bronx Honda, the defendants charged the average African-American borrower approximately $163 more in interest and the average Hispanic borrower approximately $211 more in interest than similarly situated non-Hispanic white borrowers. What’s more, African-American and Hispanic borrowers received the maximum markup 50% more often than non-Hispanic white borrowers. Non-Hispanic white borrowers did not receive a markup – or received a contract rate below the buy rate – about twice as often as African-American or Hispanic borrowers.
What was in it for Bronx Honda? The financing company compensated Bronx Honda from the increased interest revenue derived from the markup, a percentage of which the dealership passed on to its employees.
In addition to the $1.5 million financial judgment and injunctive provisions designed to remedy the violations alleged in the complaint, the Fair Lending Program required by the proposed settlement is worth a read. Under the terms of the order – which applies to defendants Bronx Honda and General Manager Carlo Fittanto – they must designate a qualified senior manager to be responsible for the program and mandate employee training at least once a year. In addition, the defendants must put written guidelines in place to establish objective, non-discriminatory criteria for assessing (or not assessing) fees and charges. What’s more, the settlement mandates specific provisions in retail installment sales contracts, including that the interest rate may be no higher than 185 basis points above the “buy rate,” and that any deviation below this markup be for only a few specific, documented reasons. And the defendants must promptly terminate any employee who engages in discriminatory conduct, violates the terms of the fair lending program, or violates other injunctive provisions of the order.