Michigan Attorney General Dana Nessel, as part of a coalition of 34 attorneys general, recently announced a settlement with Santander Consumer USA Inc. (Santander) that includes about $550 million in relief for consumers nationwide with even more in additional deficiency waivers expected.
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.
Eligible consumers have already been identified and will receive direct notice. In Michigan, 5,925 consumers will receive a $225 relief payment, and a portion of this group will also receive loan forgiveness. No personal or financial information is required from those eligible to receive the direct notice.
Restitution is being managed by the settlement administrator Rust Consulting Inc. Consumers can find information about the settlement at the administrator’s website.
The settlement – confirmed last month – stems from a multistate investigation of Santander’s subprime lending practices.
“Many individuals who enter into subprime lending agreements are working to build their credit and have few other options to obtain financing for a vehicle,” said Nessel. “For a business to take advantage of those consumers by exposing them to risky loans, excessive fees and unacceptable treatment from dealers is simply wrong. Many of Santander’s alleged business practices did precisely that, and I am grateful to the assistant attorneys general from my office for their hard work to secure relief for nearly 6,000 Michiganders as a result of this settlement.”
Based on the multistate investigation, the coalition alleges that Santander:
• Knew certain segments of its population were predicted to have a high likelihood of default, through its use of sophisticated credit scoring models, and exposed these borrowers to unnecessarily high levels of risk through high loan-to-value ratios, significant backend fees, and high payment-to-income ratios.
• Underestimated 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.
• 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 factor into its underwriting any future consumer’s ability to pay the loan.
Santander will pay $65 million to the 34 participating states for restitution for certain consumers who defaulted on loans between Jan. 1, 2010 and Dec. 31, 2019. For those consumers with the lowest quality loans who defaulted and have not had their cars repossessed, they can keep their car and Santander must 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 the states.
The settlement also includes significant consumer relief through loan forgiveness. In all, Santander has agreed to waive the deficiency balances for certain defaulted consumers, with about $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 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, the company 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. It will also implement steps to monitor dealers who engage in income and expense inflation and power booking, and will enact additional documentation requirements for those dealers, with no 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.
Joining Attorney General Nessel in the settlement are the attorneys general of Illinois, Arizona, Arkansas, California, Connecticut, the District of Columbia, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Minnesota, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, Washington, West Virginia, and Wyoming.
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