Kansas has reached a settlement requiring the nation’s largest subprime auto financing company to pay approximately $2.9 million to Kansas consumers, with more relief of as much as $1.6 million possible depending on the particular auto loan, Attorney General Derek Schmidt said today.
The settlement, involving Kansas and 33 other states, resolves allegations that Santander Consumer USA Inc. (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. The settlement stems from a multistate investigation of Santander’s subprime lending practices opened by the coalition of attorneys general in March 2015 after receiving an increase in consumer complaints related to subprime auto loans.
Based on the multistate investigation, the attorneys general allege that Santander, through its use of sophisticated credit scoring models to forecast default risk, knew that certain segments of its consumer population were predicted to have a high likelihood of default. Santander nevertheless 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, the attorneys general 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 and, moving forward, is required to factor a consumer’s ability to pay the loan into its underwriting. Restitution for Kansas consumers will depend on how and when the auto loan was made. Kansans will receive at least $2,944,784 for certain auto loans with the potential for approximately $1,659,000 additional on other loans. Consumers who are eligible for relief have been identified through Santander’s records and will be contacted by the claims administrator by phone or by mail. Consumers are not required to submit a claim as eligibility has been determined by the administrator. However, consumers who believe they are eligible for restitution may visit http://www.santandermultistateagsettlement.comfor more information.
In total, Santander will pay $65 million to the 34 participating states for restitution for certain subprime consumers who defaulted on loans between January 1, 2010, and December 31, 2019. For consumers with the lowest quality 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 loan forgiveness. Santander will also pay up to $2 million for the settlement administrator who will administer restitution claims, and pay an additional $5 million to reimburse investigation costs of the states.
The settlement also includes significant consumer relief by way of loan forgiveness. In all, Santander has agreed to waive the deficiency balances for certain defaulted consumers, with approximately $433 million in immediate forgiveness of loans still owned by Santander, and additional deficiency waivers of loans that Santander no longer owns but is required to attempt to buyback.
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. 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. If the loan is found to be unaffordable and the consumer defaulted within a certain amount of time, Santander is required to forgive that loan.
Santander is barred from requiring dealers to sell ancillary products, such as vehicle service contracts. Santander will also implement steps to monitor dealers who engage in income inflation, expense inflation, power booking, including additional documentation requirements. Santander previously allowed problematic dealers to waive documentation requirements on income and expenses, Santander no longer will allow such exceptions. If Santander has to use a defaulted mortgage or rent payment value, the amount of 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.
A copy of the settlement agreement, which has been filed with the Shawnee County District Court, is available at https://bit.ly/3e7Q8yv.