Attorney General Shapiro and 34 Attorneys General colleagues announced a settlement with Santander Consumer USA Inc. (Santander) that includes approximately $550 million in relief for consumers with even more relief in additional deficiency waivers expected. Pennsylvania consumers are eligible for at least $14.7 million in relief, including $2.1 million in restitution and at least $12.5 million in debt cancellation.
The settlement resolves allegations that Santander violated consumer protection laws by exposing subprime consumers to unnecessarily high levels of risk and knowingly placing these consumers into auto loans with a high probability of default. Today’s settlement stems from a multistate investigation of Santander’s subprime lending practices, which began in 2015.
“Predatory lending practices like this led to the 2008 financial crisis and harmed millions. I won’t let big corporations manipulate consumers and drive off with your hard-earned money,” said Attorney General Shapiro. “This settlement will put a stop to some of Santander’s most outrageous tactics, and deliver meaningful relief to Pennsylvanians who were harmed.”
Based on the multistate investigation, the group alleges that Santander, through its use of sophisticated credit scoring models to forecast default risk, knew that certain segments of its population were predicted to have a high likelihood of default. Santander exposed these borrowers to unnecessarily high levels of risk through high loan-to-value ratios, significant backend fees, and high payment-to-income ratios. The Attorneys General also allege that Santander’s aggressive pursuit of market share led it to underestimate the risk associated with loans by turning a blind eye to dealer abuse and failing to meaningfully monitor dealer behavior to minimize the risk of receiving falsified information, including the amounts specified for consumers’ incomes and expenses. Finally, they allege that Santander engaged in deceptive servicing practices and actively misled consumers about their rights, and risks of partial payments and loan extensions.
Under the settlement, Santander is required to provide relief to consumers in the form of restitution payments and debt cancellation and, moving forward, is required to factor a consumer’s ability to pay the loan into its underwriting.
Santander will pay $65 million to the 34 participating states for restitution for certain subprime consumers who defaulted on loans between Jan. 1, 2010 and Dec. 31, 2019. For consumers with the highest risk loans who defaulted as of December 31, 2019 and have not had their cars repossessed, Santander is required to allow them to keep their car and waive any loan balance, up to a total value of $45 million in debt cancellation. Santander will also pay up to $2 million for the settlement administrator who will administer restitution claims, and pay an additional $5 million to the states.
The settlement also includes significant consumer relief by way of debt cancellation. In all, Santander has agreed to waive the deficiency balances for certain defaulted consumers, with approximately $433 million in immediate cancellation of loans still owned by Santander, and additional deficiency waivers of loans that Santander no longer owns but is required to attempt to buy back.
Going forward, Santander cannot extend financing if a consumer has a negative residual income after taking into consideration a list of actual monthly debt obligations. Additionally, Santander is required to test all loans that default in the future to see if the consumer, at the time of origination, had a negative income. The test must include an amount for basic living expenses – something Santander should have factored in, but did not, in the past. If the loan is found to be unaffordable and the consumer defaulted within a certain amount of time, Santander is required to cancel that loan.
Santander is barred from requiring dealers to sell add-on products, such as vehicle service contracts or extended warranties, which are often a bad deal for consumers. Santander will also implement steps to monitor dealers who engage in income inflation, expense inflation, power booking, and Santander will enact additional documentation requirements for those dealers. Further, whereas Santander previously allowed these problematic dealers to waive documentation requirements on income and expenses, Santander no longer will allow such exceptions. If Santander has to use a default mortgage or rent payment value, the amount input must reasonably reflect the payment value for the geographic location. Finally, Santander will maintain policies and procedures for deferments, forbearances, modifications and other collection matters that all employees must follow.