Santander unit agrees $550m deceptive lending settlement

Santander Consumer USA, the largest subprime car lender in the US,
has agreed a $550m settlement to resolve claims of deceptive lending
practices brought by a coalition of state authorities.

The Dallas-based lender was accused of writing car loans it knew would have “an unacceptably high probability of default”. The listed company is majority owned by Spain’s Banco Santander.

Among the allegations are claims Santander’s “aggressive pursuit of market share” led it to turn “a blind eye to dealer abuse”, such as falsified information about the financial health of borrowers.

The loans extended by Santander had “high loan-to-value ratios, significant back-end fees, and high payment-to-income ratios”, as well as worse than expected default rates, according to the states.

“Santander knowingly exposed borrowers to unnecessary risk and placed them into loans with a high probability of default,” said Kwame Raoul, attorney-general for Illinois, which led the coalition. 

Santander Consumer USA said the agreement “resolves a legacy underwriting issue” and that it would not need to book any additional charges to cover the cost of the settlement.

“Over the last several years, we have strengthened our risk management across the board — improving our policies and procedures to identify and prevent dealer misconduct, and tightening standards to ensure affordability,” the company said in a statement.

Santander Consumer USA made $31bn in car loans in 2019, an increase of 9 per cent, and reported net income of just under $1bn. It shares have, however, been hit hard by the Covid-19 crisis, falling by 40 per cent from their all-time highs in February.

Covid-related lay-offs have been particularly heavy among hourly workers, many of whom carry subprime car debt. Interest rates on its loans average 15-16 per cent, and its borrowers have an average “Fico” credit score under 600 — well into subprime territory. 

The company was one of the first subprime lenders to issue asset-backed securities after the coronavirus crisis began, coming to market with a $965m transaction in April.

The resolution with 33 states and the District of Columbia includes approximately $480m in loan forgiveness and requires changes to its underwriting practices. It agreed a similar, smaller settlement with two states in 2017 that are not a part of this latest coalition.

In 2016, the company admitted errors in how it accounted for certain loans and credit losses, saying that three years of financial statements could not be relied upon. The problems led to turnover in the unit’s management and a $1.5m settlement with the Securities and Exchange Commission in 2018.

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