‘Fraud Dealers’

Attorneys general in both states alleged Santander enabled a group of “fraud dealers” to put buyers into cars they couldn’t afford, with loans it knew they couldn’t repay. It offloaded most of the debt, which often had rates over 15 percent, reselling them to yield-hungry ABS investors.

State authorities also said an internal Santander review in 2013 found that 10 out of 11 loan applications from a Massachusetts dealer contained inflated or unverifiable incomes. (It’s not clear whether this particular case involved a Chrysler dealer.)
Santander kept originating the dealer’s loans anyway, even as they continued to default “at a high rate,” the authorities said.

Some dealerships even asked Santander to double-check customers’ incomes because they didn’t trust their own employees, the authorities said. They also said the lender didn’t always oblige because that would put it at a “competitive disadvantage.” At the time of the settlement, Santander said it was “totally committed to treating its customers fairly.”

In some ways, the laissez-faire mindset reflects how competition squeezed Santander as demand for new cars -- and loans to finance them -- soared.

Tough Time

Without a deposit base, Santander’s auto finance unit had a tough time competing with banks for the most creditworthy buyers. Private-equity firms also poured in, vying for many of the same subprime borrowers Santander targets, but often with more relaxed underwriting. And Santander doesn’t get the same preferences that automakers’ wholly owned finance units typically receive, Bigland said.

The irony is that what got Santander into hot water did little to help it reach the lofty goals set at the outset of the 10-year venture with Chrysler. As of April, Santander financed about 19 percent of the carmaker’s sales, short of the 64 percent they targeted by that time.

While Santander takes pains to avoid criticizing Chrysler, the lender launched a special loyalty and rewards program to vet the carmaker’s dealerships. Those that aren’t deemed fraudulent during the process are labeled “VIPs.” Santander also cut ties with over 800 dealers across its network since 2015 as it tries to boost business without exposing itself to more bad loans.

“Chrysler continues to represent an opportunity for growth for us,” Richard Morrin, chief operating officer of Santander’s auto finance arm, said during an investor presentation in February. Still, “it can’t be growth at any cost.”