Santander Bank To Pay $26M Over Subprime Auto Loan Practices

One of the nation’s largest providers of automobile financing, Santander Bank, has agreed to pay $26 million to end a two-state investigation into the financial institution’s alleged violation of state consumer protection laws related to its auto loan underwriting practices. 

The Attorneys General from Massachusetts and Delaware [PDF] announced the settlements on Wednesday resolving accusations that from 2009 to 2014 Santander backed “unfair, high-rate auto loans” for thousand of car buyers in the states who could never repay the debts.

The settlements, which the states claims are the first in the U.S. involving subprime auto loans, are the culmination of a joint investigation by the offices of Massachusetts AG Maura Healey and Delaware AG Matt Denn into the financing and securitization of subprime auto loans.

These loans, known as subprime auto loans, are often made to consumers with poor credit through contracts at a car dealership. However, the loans are actually funded by a non-dealer financial institution, like Santander.

Related: John Oliver, Keegan-Michael Key Explain Why Subprime Car Loans Are So Awful

According to the AG offices, Santander allegedly funded auto loans without having a reasonable basis to believe that the borrowers could afford them.

In fact, the investigation found that Santander predicted that a large portion of the loans would default. Additionally, the bank allegedly knew that the reported incomes listed to support the loan applications submitted to the company by car dealers were incorrect and often inflated, the AG’s investigation claimed.

Santander, according to the AG’s settlement, even identified a group of dealers that had high default rates due in part, to the regular submission of inaccurate data on loan applications – most often involving inflated income.

Despite this, the bank continued to purchase loans from those dealers anyway and, in some cases, sold them to third parties.

Once the loans were approved, Santander would package the auto loans into large asset pools and then sell the bonds or notes backed by the pools. The money that was generated by the sold bonds or note was then used to fund more subprime loans. This was a process used, most recently, in the lead-up to the housing crisis.

Under Wednesday’s settlement, Santander will provide $22 million to the state of Massachusetts, with about $16 million going toward refunding harmed consumers. The bank will also pay $4 million to Delaware, of which $2.89 million will be used to refund consumers and the remainder will be paid to the Delaware Consumer Protection Fund.

Additionally, the settlement requires Santander to revise its business practices, including updating procedures to screen loans originated by car dealers and not selling any loans purchased from high risk dealers to third-parties.

A Santander spokesperson tells Consumerist in a statement the bank is pleased to put the matter to rest, but that it is neither admitting or denying any wrongdoing.

“We are pleased to put this matter behind us so we can move forward and continue to focus on serving our customers,” the spokesperson said in a statement. “Today’s voluntary agreement with the Attorneys General of Delaware and Massachusetts, which resolves an investigation dating back several years, is another important step forward in that process.”

The company also notes that over the past 18-months it has improved policies and procedures to identify and prevent dealer misconduct, put in place stronger management oversight teams, created a dealer council to focus and formalize dealer oversight issues, and enhance the efficiency of dealer monitoring and management processes.

While the settlement resolves Santander’s subprime auto loan issues in Massachusetts and Delaware, the bank is still under investigation by federal regulators.

Back in Oct. 2014, Santander received a DOJ subpoena requesting the production of documents and communications related to the underwriting and securitization of nonprime auto loans since 2007. The company was also told to preserve and produce documents and communications related to its auto loan business since the beginning of 2011.

In 2015, the bank revealed it was party to a Consumer Financial Protection Bureau investigation into alleged violations of the Equal Credit Opportunity Act that had been referred to the DOJ.

The CFPB had been looking into whether the lender overcharged customers, or treated them differently during the underwriting process, based on factors that are not to be taken into account when issuing a loan — things like race, religion, and gender.

In January, a group of lawmakers urged federal banking regulators to review the financial institution’s practices after a Committee for Better Banks report that found widespread discriminatory lending practices by Santander Bank.

In an related settlement last year, the bank agreed to pay a $10 million fine to settle allegations that it illegally charged overdraft fees to customers who didn’t affirmatively opt in to the bank’s overdraft policies.