Santander has agreed to pay $26 million to settle allegations that the bank issued high-interest loans to thousands of consumers who could not afford to repay them. The settlement was announced on March 29, 2017, by Massachusetts Attorney General Maura Healey and Delaware Attorney General Matthew Denn.
According to the press release from the State of Delaware, an investigation into the financing and securitization of Santander’s subprime auto loans revealed that the bank funded loans without having a reasonable basis to believe that the borrowers could afford them. According to the Delaware consent order, Santander predicted that “more than half” of the subprime loans acquired from certain Delaware auto dealers would default.
Santander was also accused of knowingly acquiring loans from car dealerships that falsified or inflated borrowers’ incomes. According to the Massachusetts Attorney General’s complaint, Santander knew which auto dealers had high borrower default rates and even identified a group of “fraud dealers” who inflated borrowers’ incomes to get buyers into larger loans than they could afford. One dealer overstated borrowers’ incomes by at least $45,000 a year, according to the settlement.
Despite the information Santander had regarding problematic activity and loan performance at certain dealers, the bank continued to purchase loans from those dealers and failed to address the unfair practices.
According to the settlement, Santander believed that requiring proof of income or holding car dealers to a higher standard would put Santander at a competitive disadvantage and would result in the bank acquiring fewer loans. The Massachusetts Attorney General speculated that the relaxed standards and poor oversight were a result of Santander’s goal 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 demand for these packaged and resold loans.
While Santander did not admit or deny any wrongdoing in the agreements, the bank will be required to make payments to borrowers and pay penalties to the states. Massachusetts will receive $22 million of the settlement, and Delaware will receive $4 million.
This is the second settlement between the Massachusetts Attorney General’s Office and Santander relating to its role in subprime auto lending. In November 2015, the Attorney General’s office brought an action against Santander related to its funding of loans that allegedly included expensive insurance coverages, that caused the cost of the loans to exceed the state usury limit. In that case, Santander paid approximately $5.5 million to resolve the allegations.
Earlier this month, the Federal Reserve instructed Santander to strengthen oversight of its subprime auto-lending unit because it continues to fall short of state and federal consumer protection laws.
Last month, the Office of the Comptroller of the Currency downgraded the bank’s Community Reinvestment Act rating. The bank has also failed a portion of the Federal Reserve’s stress test three years in a row.
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