Judge's gavel with a stack of cash

Subprime lenders put on notice over ties to suspect dealers

Inside Santander Consumer USA, alarm bells were ringing over a list of auto dealers that were sending rapidly souring car loans to the subprime lender.

As the dust settles on last month’s $26 million settlement deal between Santander Consumer USA and the state of Massachusetts, the case is serving as a cautionary tale for dealers who sell to consumers with poor or no credit.At issue is Santander’s practice of funding auto loans from customers who appeared on the surface to be unable to pay off the loan in the long term.

At issue is Santander’s practice of funding auto loans from customers who appeared on the surface to be unable to pay off the loan in the long term. Massachusetts alleged that Santander knowingly accepted loans from dealers it knew or suspected to be fraudulent, and Santander accepted these findings without admitting fault.

The fact is that Santander did conduct an audit of high-risk auto dealers and found that, in order to qualify more customers for loans, some were regularly inflating their incomes on loan applications by tens of thousands of dollars. That state claims that in spite of this knowledge, Santander continued to fund the suspected fraudulent loans.

Authorities and pundits are concerned that such unethical lending practices mirror far too closely the same tactics used by housing lenders prior to that market’s crash in 2008. The concern is that such fraud is more widespread than just a few dealers, and the Santander case raises a lot of eyebrows because, according to Massachusetts Attorney General Maura Healey, the company is┬áthe “largest packager of subprime auto loan securities in the US.”

 

Even given the settlement, Santander isn’t completely out of the woods. The Department of Justice and the Securities and Exchange Commission have both subpoenaed the company for documents related to its underwriting and securitization practices. At least 27 other state attorneys general have requested information from Santander.

The fallout could spread to other subprime lenders. Credit Acceptance Corp. has also received demands for information from a number of state and federal agencies.

 

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