A major lender in the auto loan market has agreed to settle a lawsuit over illegal lending practices by paying $25.9 million to two states. Individuals who financed cars in either of those states may be eligible for a share of the settlement money. This settlement is primarily important for borrowers who took out sub-prime loans to buy cars. If you bought a car in one of those states and got a loan through the dealer, your loan may be covered and you may be entitled to compensation.
Under the settlement, Spanish finance firm Banco Santander SA paid almost $25 million to to states after a joint investigation revealed predatory lending practices that target unqualified buyers with subprime loan offers. Many of those car buyers ended up owing more than their cars were worth. This is the first such settlement in the United States, though it may not be the last.
Subprime lending came to the public's attention in 2008-2009 in the financial crisis, where many banks were making mortgage loans to unqualified lenders, packaging the loans as securities, and selling them.
Santander was accused of doing the same thing, with subprime auto loans. They are the largest packager of subprime auto loan securities in the country. The company paid $22 million to the state of Massachusetts and $2.87 million to Delaware. Massachusetts Attorney General Maura Healey said that $16 million of the settlement would go to consumers.
The settlement agreement could become a template for future settlements as other states are investigating similar predatory practices. Attorney General Healey said that the scope of the settlement and nature of the settlement could be a model for other jurisdictions. At a news conference, Healey said that Santander violated state law through "poor oversight, poor practices and lax management." She gave the example of a Massachusetts woman who owed $10,000 on a $750 car loan.
In a separate statement, Delaware Attorney General Matthew Denn said that his office would continue to investigate subprime auto lending so that Delaware consumers can be confident of getting fair deals on financing.
Santander U.S. issued a statement about the settlement through chief communications officer Raschelle Burton, saying that the company was committed to treating customers fairly. Burton also stated that over the course of 18 months, their new management team had "taken significant steps" to improve the company's business practices and controls. This is an important statement coming from the company that controls one-third of the United States market for subprime auto loans and related securities.
While Banco Santander is a leader in auto loan securitization, that is not the focus of the settlement. Instead the suit focused on how the loans were originated by atuo dealers. This is not the first time Santander have been in legal trouble over their financing practices. In 2005, they paid Massachusetts %$5.5 million to settle a case where they sold overpriced insurance with their subprime auto loans. The arrangement resulted in interest rates that exceeded the state's interest rate limit.
How Securitization Works:
Financial institutions create securities by bundling loans that are backed by assets like residential real estate or motor vehicles. The financial institution bundles those loans and then sells bonds or notes backed by them. Securitization is a common practice in mortgage lending. the money raised by those sales can then be used to make more subprime loans on cars, homes, and other assets. That type of securitization came to the public's attention years ago.
Reasons for the Santander Judgment:
The Santander lawsuit focused on questionable lending practices. The company had allegedly funded many auto loans without having a reasonable belief that the borrow could afford them. The company even predicted a high default rate. An investigation into their business practices also revealed that Santander knew certain dealerships were submitted fraudulent loan applications, but kept buying their loans. The point of this purchasing of questionable loans was apparently to create a large pool of securities the bank could offer to investors.
Healey noted that this pattern of conduct mirrors what banks did in the years leading up to the subprime mortgage crisis that was a major part of the 2008 financial crisis.
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