Santander Consumer Finance USA is reportedly aiming for a settlement in a dispute with the Consumer Financial Protection Bureau (CFPB), the American government’s consumer watchdog.
Reuters cited three sources saying the overseas arm of the Spanish group’s car finance division will settle claims, first raised last year, that it misled customers about total borrowing costs and the remit of insurance policies on finance vehicles.
Unlike in other markets such as the UK, Santander Consumer Finance focuses on subprime borrowers in the USA. Its parent has just emerged from a three-year-old agreement with the Federal Reserve Bank to strengthen capital risk and governance.
The CFPB alleged the lender, which offered customers the option to temporarily lower monthly payments by paying interest only for a period, neglected to adequately explain that doing so would result in higher overall loan costs by the end of the contract. Some 10% of borrowers used the option within a year of entering the contract.
The watchdog also accused Santander of not making clear that “guaranteed auto protection” insurance products would not always pay out when the car was destroyed in an accident. In the UK, the product is known as “guaranteed asset protection”, and is provided by Santander in partnership with The Warranty Group.
Troubles in the US subprime auto market
The case against Santander Consumer Finance was initiated by the Obama-appointed chief of the CFPB, Richard Cordray, who has since been replaced by Trump’s pick Mick Mulvaney.
The decision to settle with the lender is indicative of the more laissez-faire attitude favoured by Mulvaney and the Trump administration, who have sought to dismantle a number of Obama-era CFPB measures and reduce the bureau’s workforce.
Under Mulvaney, the CFPB has gradually stopped instructing lenders how to govern practices within their dealer-brokers. USA regulation makes it difficult for carmakers to offer vehicles outside the dealer route, complicating OEMs’ effort to build a direct-to-consumer channel.
In November, as Cordray’s term was coming to an end, the CFPB released a study warning against increasingly-common car finance agreements of six years and more, which were showing higher rates of default.