TRENTON — Attorney General Gurbir S. Grewal announced that Santander Consumer USA Inc. will pay the State of New Jersey approximately $589,142, provide New Jersey consumers $2.5 million in restitution, forgive the loans of more consumers, and modify its business practices as part of a settlement that resolves a multi-state investigation into Santander’s allegedly predatory auto lending practices.
Santander is one of the largest subprime auto lenders in the United States. Subprime auto lending targets higher-risk borrowers. The loans typically involve high-interest rates and prolonged repayment plans, both of which increase the likelihood of borrower default. About 82 percent of Santander’s retail auto loans are considered subprime, and between 2013 and 2015, roughly half of Santander’s subprime auto loan borrowers defaulted.
New Jersey was part of the Executive Committee spearheading the investigation of allegations that Santander typically failed to require proof of income when considering loan applications; failed to conduct meaningful oversight of conduct by auto dealers, increasing the number of loans founded on false information; and often extended loans that were unaffordable over the life of the loan. Illinois served as the lead state, with California, Maryland, Oregon, and Washington rounding out the Executive Committee.
The multi-state settlement involves 34 States and secures monetary relief estimated to total hundreds of millions of dollars. Santander will pay $65 million in restitution to certain consumers who defaulted on their loans and $5 million to the participating States.
For some consumers who defaulted but 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. Santander also will implement reforms to make its lending practices fairer and more transparent.
The settlement also includes significant consumer relief by way of loan forgiveness, including immediate deficiency waivers for defaulted loans still owned by Santander and additional deficiency waivers for loans that Santander no longer owns but is required to attempt to buyback.
“With the financial downturn affecting so many consumers’ credit scores, we will continue to hold accountable companies whose predatory conduct targets New Jersey residents with limited financial options,” said Attorney General Grewal. “I am pleased that in this case, we were able to secure financial relief for so many hard-working New Jerseyans.”
“This settlement will help protect New Jersey consumers from being exploited by predatory lending practices,” said Paul Rodríguez, Acting Director of the Division of Consumer Affairs. “For too long, subprime auto lenders have saddled the most vulnerable consumers with unaffordable loans. This settlement represents an important step in curbing these abuses.”
The States’ investigation found that Santander’s subprime auto loans were often unaffordable over the life of the loan, mainly due to the punitive nature of simple interest, which benefits consumers who pay early, but is particularly harsh on consumers who are chronically late with their payments.
Despite their high default rates, Santander’s subprime auto lending practices proved profitable owing to low capital costs and Santander’s sale of the loans on the secondary market.
Loans that are “structured to fail,” however, may violate state and federal law, and lending that fails to consider the borrower’s capacity to make scheduled payments under the terms of the loan may constitute predatory lending.
Under the settlement announced today, Santander is prohibited from originating any loan if the consumer’s residual income – the consumer’s net monthly income minus the consumer’s total debt obligations – is zero or negative.
Santander is also required to monitor auto dealers for possible embellishment or falsification of loan applicants’ income information. In addition, Santander must contact the credit reporting agencies and request the deletion of any information related to loan modifications and loan forgiveness resulting from the settlement.
The settlement also requires greater transparency in Santander’s lending practices.
For example, Santander must clearly and prominently disclose during enrollment calls, on its loan extension authorization forms, and on loan extension confirmation letters: (1) the effect of an extension on a loan’s maturity date; (2) the application of payments between interest and principal when the consumer resumes making payments; and (3) that the extension may delay repayment of principal, resulting in more interest accruing over the life of the loan than if the consumer had not entered into an extension.
The $65 million in restitution to consumers across the country will be handled by a third-party administrator, and consumers will be notified if they meet the eligibility criteria.
Lead Deputy Attorney General Jeffrey Koziar and Deputy Attorney General Monisha Kumar of the Division of Law’s Consumer Fraud Prosecution Section handled the Santander matter on behalf of the State.