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Iowa Attorney General announces settlement with nation’s largest subprime auto financing company


This news story was published on May 22, 2020.
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Tom Miller, Iowa Attorney General

DES MOINES — Attorney General Tom Miller and 33 other attorneys general announced a settlement with Santander Consumer USA Inc. that includes approximately $550 million in relief for consumers, with more loan forgiveness 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.

“Santander committed some of the same offenses that we saw occur in the subprime mortgage market,” Miller said. “The company stuck consumers with unfair, unaffordable loans, and its failures allowed dealers to inflate borrowers’ incomes and falsify other information.”

More than 2,300 Iowa consumers could get relief under the settlement. Consumers can check the settlement website — http://www.santandermultistateagsettlement.com​ — for periodic updates on restitution and other relief.

Iowa’s petition and consent judgment were filed in Polk County District Court on Tuesday, and the settlement was approved by Polk County District Judge Robert B. Hanson. The settlement stems from a multistate investigation of the largest subprime auto financing company in the country. The investigation began in March 2015 after consumer complaints related to subprime auto loans increased.

The coalition 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 back-end fees, and high payment-to-income ratios.

The coalition also alleges 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 coalition alleges 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.

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 lowest quality loans who defaulted as of Dec. 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 the states.

In Iowa, 2,155 consumers are eligible to receive restitution of $484,534, or approximately $225 each, depending on how many consumers respond to the claims process.

A settlement administrator will contact eligible consumers. They do not have to submit any loan documentation to qualify, as their eligibility has already been determined.

In addition, Iowa’s Consumer Education and Litigation Fund will receive $30,000.

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 buy back.

In Iowa, Santander will waive the remaining balance on the 211 defaulted loans totaling $2.46 million.

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. 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, 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.

Joining Miller in the settlement are the lead states of Illinois, California, Maryland, New Jersey, Oregon and Washington, as well as the attorneys general of Arizona, Arkansas, Connecticut, the District of Columbia, Florida, Georgia, Hawaii, Indiana, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Nebraska, New Hampshire, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Wyoming.

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