Toyota will pay almost $22 million in compensation to Asian and black borrowers who were forced to pay higher loans than their white counterparts.
The settlement concludes a joint action of a civil rights watchdog and the federal regulators against the automaker.
The investigation by the Department of Justice and the federal Consumer Financial Protection Bureau (CFPB) started in 2013 and focused on the loan practices of the Toyota Motor Credit in Torrance.
Investigators have discovered that Toyota's dealership used unjustified high interest rates for black or Asian clients.
As most automakers do, Toyota Motor Credit offers a base rate for customers that results from the clients' credit-worthiness. However, auto dealers generally use the "dealer markup," which means that they can pack additional interest rates over the standard one.
The fact that the car dealers have artificially raised the interest to loans for minorities prompted the authorities to investigate.
"No consumer should be forced to pay more money for a loan because of their race or national origin," Eileen Decker, U.S. Attorney of the Central District of California, says.
In the recent complaint, the Department of Justice points out that Toyota was aware of the high discrimination risk that came with letting dealers impose their own markup rates.
The figures reveal that borrowers with African-American features paid 0.27 percent more, whereas Asian borrowers shelled out 0.18 percent more than white clients. The comparison was done on clients with close to identical credit histories.
At the end of the credit, black borrowers paid $200 more than white folks, while Asian borrowers paid $100 more than Caucasian-looking customers.
No official information exists on the precise number of overcharged loan borrowers who were discriminated, but the sum from the settlement indicates that the number goes north of 100,000.
Those who took loans from Toyota's car dealers between January 2011 and Feb. 2, 2016, will get about $20 million in restitution.
As part of the settlement, the automaker will cap the amount of extra interest in its dealerships.
Car dealers that sold Toyota vehicles bloated the loan's interest by as much as 2.5 percentage points. The settlement reads that loans under five years will have a dealer markup of maximum 1.25 points, while loans that last more than five years get a top dealer markup of 1.0 point.
The carmaker will provide an extra $2 million to compensate the new borrowers, until the new policy of fixed rates are in place.
Toyota Motor Credit makes it clear that the company rejects all types of discrimination, even those that are simply perceived or unintentional, and the equality and tolerance policy applies to fair lending practices. Toyota notes that the settlement was a voluntary decision of its financial arm.
The CFPB is a consumer watchdog that is no stranger to starting legal actions against carmakers who mistreat clients. The bureau fined Ally Financial, a former subsidiary of General Motors, with $18 million in 2013. The federal decision included $80 million payment in restitution, as well. In 2015, two important auto lenders agreed to pay restitution over allegations of discriminatory lending. They were Fifth Third Bank and American Honda Finance Corp.
Other companies, such as forward-thinking Tesla Motors, aim to bypass the car dealership paperwork altogether. The company pleads with the state of Texas to allow customers to purchase Tesla cars right from the Internet, thus eliminating the middleman.