Santander investigated over sub prime loan practices

The New York City Department of Consumer Affairs (DCA) has launched its first ever investigation into sub prime loans within the auto sector, issuing subpoenas to Santander Consumer USA and Santander Consumer Funding 3 amid growing concerns over used car dealer financing practices in the city.

“Studies show that subprime loans, which have been blamed for the country’s mortgage crisis, are growing at a staggering rate of more than 130% since the financial crisis,” said DCA Commissioner Julie Menin. “For many families, especially those with low incomes, a car is one of the biggest purchases they make and if they are looking to a subprime loan, it’s because they are already struggling financially. With this investigation, DCA is taking an innovative and aggressive approach to investigating used car dealer practices by looking at their relationships with banks.”

Menin said this inquiry builds on DCA’s earlier investigations, which raised concerns that dealerships may be engaged in illegal predatory practices such as selling expensive and unwanted add-ons and arranging high-interest subprime loans without informing consumers of information they are required to provide so that the consumer can make a smart choice about financing.

DCA’s investigation is focused on indirect auto loans financed by lenders such as Santander and sold to consumers by New York City used car dealerships and will examine records of these loans over the past three years. New York law requires that if a dealership recommends a financing company such as Santander to a consumer, they must disclose the interest rate that the company can charge and other terms and charges, but DCA’s earlier investigations uncovered information that suggests that dealerships may not be complying with this requirement. Instead, dealers are directing consumers to costly loans which benefit the dealer and ultimately harm the consumer.

Santander Consumer USA is also currently licensed by DCA as a debt collection agency. As part of its investigation, DCA is also looking into the company’s debt collection practices. The US Department of Justice is currently investigating Santander Consumer USA’s subprime auto loan business.

This latest development follows an announcement in July of a DCA investigation into whether used car dealerships were selling unrepaired recalled cars which saw the department issue subpoenas to 200 dealers.

Last month, DCA announced a settlement agreement with Planet Automotive, which requires the used car dealership to pay $441,000 in fines and consumer restitution to 39 New Yorkers and to adhere to strict compliance with the law. The settlement agreement requires the dealership to provide any consumer who wants financing with a notice stating that consumers are not required to finance through the dealership, as well as other information about credit scores, obtaining a credit report, the finance charge for the purchase of add-ons, including warranties and insurance, and the total finance charge and monthly installment cost to purchase the vehicle without add-ons. The settlement agreement, for the first time, also requires the dealership to check the recall status of each vehicle and repair all safety defects prior to sale.

DCA, which licenses 854 used car dealerships citywide, conducted more than 500 inspections of used auto dealers and issued 170 violations last year. During that time, DCA received 261 complaints about used car dealerships.

Separately, in its quarterly filing with the US Securities and Exchange Commission Capital One Financial Corp said it had received a subpoena from the New York district attorney’s office about its subprime auto finance practices.