Santander Unit to Pay $25 Million Over Subprime Auto Loans

  • Spanish bank is the biggest securitizer of such loans in U.S.
  • Santander paid $5.5 million to the state in 2015 related probe

A Banco Santander SA unit will pay almost $25 million to two U.S. states to resolve a joint investigation into predatory subprime auto loans that resulted in buyers owing thousands of dollars more than their cars were worth -- the first such accord in the country.

Santander Consumer USA Holdings Inc., which is also the the biggest packager of subprime auto loan securities in the country, will pay $22 million to Massachusetts and $2.87 million to Delaware, state officials said. The accord could be used as a template by other states investigating the same alleged wrongdoing across the country, they said.

"I think the scope of the settlement and the kind of relief we’re getting could be used as a model for other jurisdictions," Massachusetts Attorney General Maura Healey said in a phone interview, adding that $16 million of the total will go to consumers. "Hopefully, our actions will help others." 

At a news conference, Healey said Santander violated state consumer laws "through poor oversight, poor practices and lax management." She cited one example of a Massachusetts car buyer who ended up owing more than $10,000 on a $750 vehicle loan.

Delaware Attorney General Matthew Denn said in a separate statement that his office would "continue to pursue investigations in this area to ensure that Delaware consumers receive a fair deal when they are extended credit to finance a purchase."

Raschelle Burton, chief communications officer for Santander U.S., said the company is “totally committed to treating customers fairly.”

“In the last 18 months, our new management team has taken significant steps to strengthen our business practices and controls,” she said in a statement.

Auto Deals

The subprime auto deals have some similarities to the toxic residential-mortgage loans that helped trigger the 2008 global financial crisis. The RMBS debacle led to $1.946 trillion of writedowns and losses.

Healey said Massachusetts sued banks over residential mortgage-backed securities and became the first state to establish that "it’s illegal to make a loan if you know they can’t pay it back." The state recovered hundreds of millions of dollars in those earlier subprime cases.

As Wall Street banks have found it tougher to profit under regulatory regimes born out of that subprime crisis, they’ve become more willing to underwrite riskier auto-loan asset-backed securities. Investors, starved for returns with about $8 trillion of debt globally carrying negative yields, have in turn proven to be insatiable, further facilitating higher levels of risk in the market for the securities.

Deep Subprime

In a March 24 report, Morgan Stanley said a third of risky car loans that are bundled into bonds are considered "deep subprime,” compared with 5 percent in 2010, leading to higher delinquencies. “Auto loan fundamental performance, especially within ABS pools, continues to deteriorate,” according to the report.

More than a third of the multibillion-dollar U.S. market for subprime auto loans and securitization is controlled by Santander and its related entities, according to the statement.

The deals, involving car loans to consumers with poor credit, are often struck at the dealership and funded by financial institutions such as Santander. The loans are then dropped into large asset pools that are used to back the sale of bonds or notes, Healey said.

"Money obtained from the securitization process is then used to fund more subprime loans," she said.

Santander in 2015 paid Massachusetts $5.5 million to settle a related investigation into overpriced insurance being tacked onto subprime auto loans, causing the deals to exceed state usury limits, according to the statement.

— With assistance by Matt Scully, and Jef Feeley

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