Santander to pay $26m to lodge subprime auto-loan case

Mark Lennihan/Associated Press/File

Santander will pay $26 million to lodge allegations that it gave high-interest loans to car buyers it knew could not repay them, a lending tactic that helped trigger the housing market crash almost a decade ago.

Santander`s practice of working with car dealerships that falsified or inflated borrowers` incomes was «shocking,» said Massachusetts Attorney General Maura Healey in announcing the settlement Wednesday. The bank would then resell the loans, knowing they were unsound, to investors.

«The global economic collapse wasn`t a cautionary tale. It was a blueprint» for Santander, Healey said.

The settlement inbetween Santander Consumer USA Holdings Inc., the bank`s subprime auto lending division, Healey, and Delaware Attorney General Matthew Denn marks the very first agreement in the country over how banks financed these auto loans.

Massachusetts will receive $22 million of the settlement, and Delaware – which joined Massachusetts in the case – will receive $Four million.

Some borrowers will have their outstanding loans paid off as part of the settlement.

Santander`s drive to capture a larger share of the subprime auto lending business, targeted at lower-income borrowers and those with bad credit, and the need to meet investor request for these packaged and resold loans, led to relaxed standards and poor oversight by the bank, Healey said.

Santander has implemented fresh controls and oversight practices in its auto-lending business, bank officials said.

The bank noted that the alleged problems, which date from two thousand nine to 2014, are consumer protection issues and are not related to the reselling of the loans to investors.

Under the settlement, Santander neither denied nor admitted wrongdoing.

«We are pleased to put this matter behind us so we can budge forward and proceed to concentrate on serving our customers,» Raschelle Burton, a spokeswoman for Santander, said in a statement. «We will proceed to strengthen our business controls and dealer management program while ensuring that we are focusing on best-in-class consumer practices.»

But some Massachusetts consumers who financed their cars through Santander said they are fighting.

Kathleen Ann Boluch, 59, of Cohasset, bought her Chevrolet sport utility vehicle in two thousand twelve from a local dealership after her old car was rear-ended by a tipsy driver. She bought the $Legitimate,000 car with financing from Santander that carried an interest rate of more than twenty percent.

Boluch said that when she told the car salesman that she was a freelance writer who did advertising work, he suggested she could help the dealership with its promotional work and listed her as an employee on her loan application.

Boluch said she never got any work from the dealership and has instead taken odd jobs, from substitute training to baby-sitting, to help pay the $350-a-month car loan. Last summer, the car broke down, needing a fresh transmission that she couldn`t afford. She`s had to borrow a family member`s vehicle.

Meantime, she still owes about $Ten,000 on her Santander loan.

«I pay every month, but this loan does not go away,» she said.

According to Healey`s complaint, Santander knew which dealers had high rates of borrower defaults, which exaggerated the value of cars, and even identified a group of «fraud dealers» who inflated borrowers` incomes to get buyers into larger loans than they could afford. One dealer inflated borrowers` incomes by at least $45,000 a year, according to Healey.

Yet Santander continued to do business with those dealers and failed to rein in their practices, according to Healey. In some cases, Santander required that some dealers buy back loans that had defaulted, she said.

Healey declined to comment on which dealerships falsified or inflated loans to consumers in Massachusetts, but said her office is conducting an ongoing investigation of other lenders and auto dealers.

Auto lenders have had little incentive to ensure that consumers are in loans that they can afford, said John Van Alst, an attorney for the Boston-based National Consumer Law Center.

«With the competition in subprime auto finance, how do companies get market share?» Van Alst said. «One of the ways they do that is to look the other way when dealers were doing the wrong thing.»

Almost a quarter of the $1.135 trillion in outstanding auto loan debt nationally involves subprime borrowers. These loans can be riskier for investors but suggest the potential of higher comebacks and were attractive in latest years in an otherwise low-interest rate environment. For Santander, the largest packager and seller of subprime auto loans, it was also an significant part of its business.

But in latest months, there have been enlargening signs that the subprime auto loan market is weakening, with more delinquencies. According to the Fresh York Federal Reserve, in the third quarter of 2016, delinquencies among borrowers with low credit scores hit two percent, the highest level since 2010.

The subprime market – and Santander in particular – is also coming under greater scrutiny.

Earlier this month, the Federal Reserve told Santander to strengthen oversight of its subprime auto-lending unit because it resumes to fall brief of state and federal consumer protection laws.

Santander is possessed by Spanish financial giant Banco Santander and in latest years has struggled to meet US regulatory standards.

Last month, the Office of the Comptroller of the Currency downgraded the bank`s rating in community lending. The bank has also failed a portion of the Federal Reserve`s stress test three years in a row.

Under the settlement with Healey`s office, more than Two,000 Massachusetts consumers will share $16 million in ease.

Besides the payments to borrowers, Massachusetts will get an extra $6 million from Santander to lodge the allegations, according to Healey.

For Andy Wilkinson, 29, of Freetown, the settlement will likely help offset the payments he has to make for a Chevy Impala he bought in two thousand eleven to drive to North Carolina for Army medic training.

But the deal still feels unsatisfying, he said.

Wilkinson said that after he returned from Iraq he had to get knee surgery and asked Santander for a deferment on his car loan, since he would be out of work for a few months. Santander never told him that his request had been denied and when he wished to restart payments, he discovered that his loan had been sent to a collection agency and his credit was ruined.

It has taken him years to repair his credit. The car he bought no longer works, but he still pays almost $300 a month on the loan.

«I think Santander got fortunate to only have to pay $26 million,» Wilkinson said. «Every time I pull into my driveway, it`s a solid crimson reminder of the worst decision of my life.»

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