Santander’s subprime auto-lending division will pay $26 million to settle allegations that it provided unfair, high-interest loans to car buyers they knew could not repay them, repeating a pattern of mortgage lenders in the run-up to the last housing bust. Massachusetts will receive $22 million and Delaware will receive $4 million.
This is the first of its kind relating to how financial institutions packaged subprime auto loans into securities and resold them to investors.
Santander has implemented new controls and oversight practices of its auto-lending business, bank officials said.
Subprime auto loans are made to consumers with substandard credit scores or limited credit histories, usually the poor. Theycan carry higher interest rates.
These loans can be riskier for investors but offer the potential of higher returns and were attractive in recent years in an otherwise low-interest rate environment.
According to Massachusetts Attorney General Maura Healey, Santander was aware that some of the auto dealers that it worked with inflated or falsified borrower incomes in loan applications. In an internal audit, Santander identified a group of “fraud dealers,” but continued to fund loans through them, according to Healey.
Under the settlement, more than 2,000 Massachusetts consumers will receive $16 million in relief. Santander will also pay Massachusetts $6 million to settle the allegations, according to Healey.
Officials from Santander were not immediately available to comment.