Many people in Massachusetts and Delaware may soon get relief after being given auto loans they cannot really afford. In March of this year, a major subprime lender, Santander Consumer Holdings USA, reached a settlement with Attorney Generals' offices in those states. This is not the first settlement agreement between Santander and a state over questionable lending practices.
The Attorney General investigations were based on claims that Santander made loans to car buyers while knowing the borrowers were probably not able to afford the loans. A press release from the Delaware Department of Justice indicated that Santander had predicted a high default rate and that many applicants stated incorrect or exaggerated incomes.
Santander did not admit to wrongdoing it the settlement. The bank did promise to improve its processes for screening loan applications and approving loans. Those business process improvements are in direct response to the investigation and settlement.
About the Settlement:
If you have an auto loan from Santander and live in Delaware or Massachusetts you may entitled to a portion of the $25.9 million settlement being used to resolve cases in those states.
The settlement deal divides Santander's money in several parts. The bank will put $2.875 million in a trust fund that will go to affected customers in Delaware. They will contribute more than $1 million to the Delaware Consumer Protection Fund, which supports investigations into consumer fraud and other problems.
In Massachusetts, Santander will pay $16 million directly to consumers. Another $6 million will go to the state. Consumers in each state who are eligible for a payment under this agreement will be contacted the Attorney General's office in their respective state.
In Massachusetts, more than 2,000 consumers received subprime auto loans. Attorney General Maura Nealy said that one dealer was illicitly increasing borrowers' incomes by $45,000 per year. This income inflation by dealers may have occurred at other Delaware and Massachusetts. Car dealers generally grant loan approval, but the money comes from banks.
About the Case Against Santander:
Court documents say Santander purchased loans from dealers in spite of the applications containing inaccurate information. Santander allegedly also sold some of those questionable loans to third parties.
Santander is the largest packager of subprime auto loans in the United States. They are a division of the Spanish-based Banco Santander SA, which went public in 2014. Santander bank officials expressed relief that the issue had been settled. It also stressed that this was an issue with how auto loans are originated, not about securitization of the loans. Securitization is the process of converting debts, such as auto loans or mortgages, into assets that can be sold to third-parties. Mortgage-backed securities, for example, are bundles of mortgage loans secured by the homes. An auto loan security is a bundle of car loans.
According to Attorney General Healy, the investigation indicated that Santander funded loans without having a reasonable basis to believe that the borrowers could afford them, actually predicting that many borrowers would default. In spite of that, the bank packaged and sold many loans to third parties.
The bank also knew that certain car dealers had high default rates due to inaccurate data on their loan applications. But, the bank kept buying loans from those dealers. Officials even said that Santander identified a group of dealers who it called "fraud dealers" whose loans the bank continued to buy. Healy likened this buying and packaging to behavior that happened in the subprime mortgage market that contributed to the 2008 financial crisis.
This investigation and settlement appear to show a wider issue in the subprime auto lending business. Healey's office even said that the settlement was part of an ongoing investigation of securitization practices in subprime auto lending.
Other questionable lending practices have come under investigation by Nealy's office. There has been at least one other investigation and settlement in related lending practices. A 2015 agreement for $3.5 million against Santander for funding loans that included expensive insurance that consumers did not request.
The settlement follows an earlier 2015 accord for $5.5 million between Healey's office and Santander relating to its funding of loans that included expensive insurance coverage.
Do you have a Santander-backed loan in Delaware and Massachusetts?