If you own a car then you may be familiar with the process of getting an auto loan. For those that don’t know how it works typically when applying for a car loan, a lender (usually a bank or credit union ) will pre-approve you for a loan amount that is determined by your credit history and other financial information that would also be used to figure out how much you will have to pay back. At the dealership you will negotiate the price you will want to purchase the car of your choice for and may even consider getting financed by the dealership if they offer better rates before all is said and done. From there after you’ve made your purchase you begin filling out the paper work leaving only the monthly payments left to worry about. Many drivers can tell you that getting a car loan is easier said than done especially for those with a less than perfect credit score and as hard as it is for many people to get pre-approved for a loan, applicants now will have to worry about being victims to one of the latest issues to hit the auto lending industry.
One of the biggest scandals taking place in the auto lending industry concerns the finance and securitization of subprime auto loans. Subprime loans are loans given to less ideal loan applicants who usually possess low credit scores and so have higher interest rates and less favorable terms to compensate for the credit risk they pose to lenders. There have been over a thousand cases of auto loan lenders, however, targeting borrowers applying for loans knowing well that they would fall behind on their payments but were approved anyway regardless of their inability to repay it back. Auto lender, Santander Consumer USA (SCUSA), specifically it’s Massachusetts and Delaware branch is said to be main culprit targeting unqualified borrowers behind these scandals and as of now has agreed to pay a settlement of $25.9 million for it’s actions. According to a report by Bloomberg, there has been a high rate of subprime borrowers falling behind on payments not seen before since the 2008 recession. The report also says that auto loan lenders are not the only ones responsible as automakers also have taken part in scamming loan applicants relying on “cheap and easy credit” from other financial institutions which have resulted in 10% of senior bank officers pulling back on funding them.
When the New York Times reported these scams it caught the attention of one victim, Kathleen Boluch, who in October 2012 was approved for a $18,000 car loan for a new Chevrolet when a drunk driver damaged her old car. It was not long after she received the loan that she fell behind on monthly payments. An investigation conducted by attorney generals at Massachusetts and Delaware revealed that not only did SCUSA predicted that their borrowers would not be able to afford them but also bought loans from dealerships with high default rates due to inaccurate data. Massachusetts Attorney General Maura Healey, head of the investigation, believes that the practice may not be limited to just Santander and just the state of Massachusetts alone. “These predatory practices are almost identical to what we saw in the mortgage industry,” said Healey comparing it to a similar scheme involving banks providing sub prime mortgage loans that contributed to the 2008 financial crisis. It is also believed non-bank lending firms have a hand to play in the subprime lending schemes as well as the bank bought high-risk auto loans from a group of dealers nicknamed “fraud dealers“ and sold them to investors.
Santander has agreed to pay $22 million in the Massachusetts case and $3.9 to resolve the Delaware case and $2.88 million to a trust for the benefit of the Delaware consumers that were harmed. About $16 million dollars was also agreed upon to provide relief for 2,000 customers. As part of the Delaware agreement, Santander has made arrangements to implement business reforms to prevent issues like this from happening. Such changes include identifying and repurchasing sub-prime loans sold to third parties that it would later determine whether it would comply with Delaware law, create procedures that will accurately screen loans from Delaware dealers that are in agreement with Delaware law and not selling any loans from “high risk” dealers to third parties. Since then SCUSA has in the past year and a half took extra steps to improve their business practices and maintain proper oversight of loan dealership activities within the states of Massachusetts and Delaware.