Sub-prime auto loans warning after fine for Santander Consumer USA

Auto lender Santander Consumer USA (SCUSA) is to pay $25.9 million to settle complaints brought before courts in both Massachusetts and Delaware relating to the financing and securitization of sub-prime auto loans.

Massachusetts attorney general Maura Healey described the state’s $22 million penalty as a “first-in-the-nation settlement involving sub-prime auto loans”.

Healy said: “We found that Santander, a leading player in the business of packaging and reselling sub-prime auto loans, funded unfair and unaffordable auto loans for more than 2,000 Massachusetts residents.”

The investigation, handled jointly with the Delaware attorney general’s office, revealed that Santander allegedly funded auto loans without having a reasonable basis to believe that the borrowers could afford them.

In fact, Santander predicted that many of the loans would default, and allegedly knew that the reported incomes, which were used to support the loan applications submitted to the company by car dealers, were incorrect and often inflated.

The settlement includes $16 million in relief to more than 2,000 affected consumers and a $6 million payment to Massachusetts. Santander has also agreed to implement new oversight policies.

The attorney general’s office found that Santander’s own internal audit concluded that the company’s oversight of auto dealer conduct when making sub-prime loans was inadequate.

Despite identifying a group of dealers that had extremely high default and delinquency rates and other problems, the company continued to fund loans through these dealers.

Santander also allegedly identified a group of dealers it called the “fraud dealers”, but continued to fund loans through them.

Healey warned that sub-prime auto loan funding mechanisms have many similarities to the residential mortgage loan funding which played an important role in the 2008 financial crisis, and said this settlement is part of an ongoing review of securitization practices in the sub-prime auto market.

This is the second settlement with Santander relating to its role in sub-prime auto lending in Massachusetts.

In November 2015, the attorney general’s office brought an action relating to Santander’s funding of loans that allegedly included expensive insurance coverages, which caused the cost of the loans to exceed the state usury limit. In that case, Santander provided approximately $5.5 million in loan relief and payments to Massachusetts to resolve the allegations.

Delaware consumers

In the latest case, Santander is also to pay $2.875 million into a trust for the benefit of harmed Delaware consumers.

A trustee will be appointed to locate and pay restitution to hundreds of people who financed vehicle purchases through Santander.

In addition, Santander will pay just over $1 million to the Delaware Consumer Protection Fund, which pays for work on consumer fraud and deceptive trade practice matters and other consumer-oriented investigations and legal actions.

Matt Denn, Delaware attorney general, said: “Protecting consumers from unfair lending practices is extremely important and has been a priority for our office.

“We are pleased that this settlement results in significant consumer relief and provisions that will prevent similar misconduct in the future. We will continue to pursue investigations in this area to ensure that Delaware consumers receive a fair deal when they are extended credit to finance a purchase.”

The agreement also requires business reforms by Santander.

They include procedures to screen loans originated by Delaware dealers to ensure that they are in compliance with Delaware law and that minimum documentation requirements are met; not waiving those screens or documentation requirements with respect to Delaware dealers identified as “high risk”; and not selling to a third-party any loans purchased from Delaware “high risk” dealers that have failed a screen or the documentation requirements.

Santander has also agreed, on a prospective basis, to identify and repurchase sub-prime loans sold to third parties that it later determines do not comply with Delaware law.

In a statement, SCUSA said it was pleased to resolve the issue, and stressed that the settlements, which focused on how auto loans were originated, were not about securitizations themselves.

The SCUSA statement said: “In the last 18 months, our new management team has taken significant steps to strengthen our business practices and controls.”