Santander agrees to US$550 million settlement over subprime auto loans

FILE PHOTO: Automobiles are offered for sale at a car dealership in Carlsbad, California, U.S., May 2, 2016. REUTERS/Mike Blake/File Photo

WASHINGTON (Reuters) – Santander Consumer USA Holdings Inc said on Tuesday it had agreed to change its underwriting practices as part of a $550 million settlement with 33 states and the District of Columbia over subprime auto loans.

States said Santander violated consumer protection laws by placing borrowers with subprime credit in auto loans it knew had a high probability of default. Santander agreed to pay $65 million for the restitution of certain clients and to waive deficient balances on loans worth $478 million. It will also pay $7 million to states to handle restitution claims.

Santander, the country’s largest subprime auto finance company and a branch of Spanish bank Banco Santander SA which went public in 2014, said it was pleased to resolve the investigation and “no additional fees will be charged in within the framework of the regulations”.

“Santander profited from approving high-cost loans to disadvantaged auto buyers who were doomed from the start,” California Attorney General Xavier Becerra said in a statement.

California said Santander had approved loans it expected to default at rates above 70% and alleged that “Santander’s aggressive pursuit of market share has caused it to under- estimate the risk associated with loans by turning a blind eye to the abuses of dealers”.

For certain consumers who have defaulted but the car has not been repossessed, Santander is required to allow them to keep them and waive loan balances up to a total of $45 million and waive deficient balances on other loans totaling $433 million.

Santander agreed not to buy loans where consumers would likely run out of money per month, and not to require car dealerships to sell “back-end” add-on products to consumers.

In 2017, Santander agreed to pay $25.9 million to resolve investigations by the Massachusetts and Delaware attorneys general into subprime auto loans.

Reporting by David Shepardson; Editing by Chizu Nomiyama