The settlement between Santander Consumer USA Holdings Inc., the bank’s subprime auto loan division, Healey, and Delaware Attorney General Matthew Denn, marks the first deal in the country on how banks have funded these auto loans. .
Massachusetts will receive $ 22 million from the settlement, and Delaware – which joined Massachusetts in the case – will receive $ 4 million.
Some borrowers will have their loans repaid as part of the settlement.
Santander’s desire to capture more of the subprime auto loan business, targeted at low-income borrowers and those with bad credit, and the need to meet investor demand for these packaged and resold loans, led to relaxed standards and poor supervision of the bank. , Healey said.
Santander has implemented new controls and supervisory practices in its auto-lending business, bank officials said.
The bank noted that the alleged problems, which date from 2009 to 2014, are consumer protection concerns and are not related to the resale of bad credit loans to investors.
Under the settlement, Santander has neither denied nor admitted the wrongdoing.
“We are happy to leave this issue behind so that we can move forward and continue to focus on serving our customers,” Santander spokesperson Raschelle Burton said in a statement. “We will continue to strengthen our business controls and dealer management program while ensuring we focus on best-in-class consumer practices.”
But some Massachusetts consumers who financed their cars through Santander said they were having trouble.
Kathleen Ann Boluch, 59, of Cohasset, bought her Chevrolet sport utility vehicle in 2012 from a local dealership after her old car was hit by a drunk driver. She bought the car for $ 18,000 with financing from Santander which carried an interest rate of over 20 percent.
Boluch said that when she told the car salesman that she was a freelance writer doing advertising work, he suggested that she could help the dealership with their promotional work and listed her as an employee on his loan application.
Boluch said she never got a job at the dealership and instead took odd jobs, from substitute teaching to babysitting, to help pay off the $ 350 per month car loan. . Last summer the car broke down, requiring a new transmission that
she couldn’t afford it. She had to borrow a family member’s vehicle.
Meanwhile, she still owes around $ 10,000 on her loan in Santander.
“I pay monthly, but this loan doesn’t go away,” she said.
According to Healey’s complaint, Santander knew which dealerships had high rates of borrower defaults, which exaggerated the value of cars, and had even identified a group of “fraudulent dealers” who were inflating borrower income to get buyers. more important than they could afford. One dealership inflated borrower income by at least $ 45,000 a year, according to Healey.
Still, Santander continued to do business with these dealers and failed to get a handle on their practices, according to Healey. In some cases, Santander has demanded that some dealers buy back overdue loans, she said.
Healey declined to comment on dealerships that tampered with or inflated Massachusetts consumer loans, but said his office was investigating other lenders and auto dealers.
Auto lenders have little incentive to make sure consumers get loans they can afford, said John Van Alst, an attorney with the National Consumer Law Center in Boston.
“With competition from subprime auto finance, how are companies gaining market share?” Said Van Alst. “One of the ways to do this is to look away when the dealers are not doing the right thing.”
Nearly a quarter of the $ 1.135 trillion in auto loan outstanding nationwide is with subprime borrowers. These loans may be riskier for investors, but offer the potential for higher returns and have been attractive in recent years in an otherwise low interest rate environment. For Santander, the world’s largest conditioner and seller of subprime auto loans, it was also an important part of its business.
But in recent months, there have been more and more signs that the subprime auto loan market is weakening, with more defaults. According to the New York Federal Reserve, in the third quarter of 2016, delinquencies among borrowers with low credit ratings reached 2%, the highest level since 2010.
The subprime market – and Santander in particular – is also coming under closer scrutiny.
Earlier this month, the Federal Reserve asked Santander to step up oversight of its subprime automatic lending unit, as it continues to violate federal and state consumer protection laws.
Santander is owned by Spanish financial giant Banco Santander and in recent years has struggled to comply with US regulatory standards.
Last month, the Office of the Comptroller of the Currency downgraded the bank’s rating on community loans. The bank also failed part of the Federal Reserve’s stress test three years in a row.
As part of the settlement with Healey’s office, more than 2,000 Massachusetts consumers will share $ 16 million in relief.
In addition to payments to borrowers, Massachusetts will receive an additional $ 6 million from Santander to settle the allegations, according to Healey.
For Andy Wilkinson, 29, of Freetown, the settlement will likely help offset payments he has to make for a Chevy Impala he bought in 2011 to travel to North Carolina for military medical training.
But the deal is still not satisfactory, he said.
Wilkinson said after returning from Iraq he had to have knee surgery and asked Santander to postpone his car loan as he would be out of work for a few months. Santander never told him that his request was denied and when he wanted to restart the payments he found out that his loan had been sent to a collection agency and his credit was ruined.
It took her years to repair her credit. The car he bought no longer works, but he still pays nearly $ 300 a month on the loan.
“I think Santander was fortunate enough to only have to pay $ 26 million,” Wilkinson said. “Every time I stop in my driveway it’s a steadfast red reminder of the worst decision of my life.”
Deirdre Fernandes can be reached at deirdre.fernandes
@ globe.com. Follow her on Twitter @fernandesglobe.