Dive Brief:

• Santander Consumer USA, the consumer lending arm of Spain's Banco Santander, reached a $550 million agreement to settle charges from 34 attorneys general that it made auto loans it knew low-income and subprime borrowers could not pay.
• The lender is set to pay consumers $65 million in restitution. But the bulk of the settlement — $478 million — comes in the form of loan forgiveness. Santander agreed to waive about $45 million in loan balances for consumers who had defaulted as of Dec. 31 but whose cars were not repossessed. Santander will also waive at least $433 million in deficiency balances — the amount consumers owe after their cars are repossessed — although the attorneys general said that figure could be as high as $663 million.
• Tuesday's agreement caps a probe the states launched in 2015, but the Spanish bank's subsidiary has been unwinding issues in its auto lending practices for years. The Federal Reserve issued an enforcement order in 2017 requiring Santander Consumer to improve its risk management practices. That same year, it agreed to pay $25.9 million to resolve investigations in Massachusetts and Delaware over subprime auto loans. Santander also agreed in 2018 to settle charges in California that it had not properly disclosed certain referral fees.

Dive Insight:

Santander violated consumer protection laws by locking subprime borrowers into auto loans it knew, in some cases, carried default rates of greater than 70%, according to a statement from California Attorney General Xavier Becerra. California was joined in the suit by the top lawyers of 32 other states and the District of Columbia.

"Santander profited by approving high-cost loans to disadvantaged auto buyers who were doomed from the start," Becerra said in the statement.

As part of the settlement, the bank agreed to alter its underwriting so as to factor in borrowers' ability to repay loans. It also agreed not to fund loans that would take up a borrower's entire income when combined with other debt payments and monthly costs.

In their complaints, the states asserted Santander didn't verify several figures in auto-loan applications that would have shed light on whether consumers could afford the financing. For example, the lender did not require documentation from car dealers or consumers to prove the income levels listed on applications, the states said.

Santander also rarely verified applicants' housing costs and didn’t have measures in place to identify falsified figures, the states alleged, according to The Wall Street Journal. When a loan application didn't include housing costs, Santander would assume a lower figure than what was reasonable for the area, the complaints alleged.

Compounding the problem, Santander tracked dealers that submitted risky loans or falsified applications but often failed to cut ties with them if the loans were profitable enough, the states said.

Santander’s loans, with interest rates often in double digits, are typically packaged into bonds and sold to investors. Santander issued $8.3 billion worth of those bonds last year, according to data from ​Finsight — more than twice as much as any other subprime auto lender, the Journal reported.

"Over the last several years, we have strengthened our risk management across the board — improving our policies and procedures to identify and prevent dealer misconduct, and tightening standards to ensure affordability," Santander said Tuesday in a written statement, according to American Banker.

The bank said it had been expecting the settlement, has set aside funding for it and will not take any additional charges to its earnings.