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Auto Lender Santander Checked Income on Just 8% in Subprime ABS

Matt Scully

(Bloomberg) -- Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just 8 percent of borrowers whose loans it recently bundled into $1 billion of bonds, according to Moody’s Investors Service.

The low level of due diligence on applicants compares with 64 percent for loans in a recent securitization sold by General Motors Financial Co.’s AmeriCredit unit. The lack of checks may be one factor in explaining higher loan losses experienced by Santander Consumer in bond deals that it has sold in recent years, Moody’s analysts Jody Shenn and Nick Monzillo wrote in a May 17 report, which reviewed data required of asset-backed bond issuers that’s recently been made available.

Limited verification of loan applicants’ stated incomes and employment “creates more uncertainty around whether borrowers will be able to afford their monthly payments, which becomes particularly important if they have poor credit records and risky loan terms,” the analysts wrote.

Consistent Policy

Andrew Kang, Dallas-based Santander Consumer’s treasurer, acknowledged Moody’s findings and said the company’s practice on income verification has been consistent over time even if it’s lower than levels reported among competitors.

The higher losses in the loans backing the bonds have been visible to investors, Kang said. Investors have been protected because Santander Consumer included extra loans in the securities in case some went bad, for example, creating a buffer against losses, he said. The Moody’s analysts didn’t make any claim that noteholders were at risk as the bond-grader simply looked at the new data available in the deals to provide analysis on how lenders underwrite.

Moody’s rated the Santander deal as high as Aaa in February. Investors who bought into the securities included Massachusetts Mutual Life Insurance Co., according to data compiled by Bloomberg.

Federal regulations put in place following the 2008 financial crisis effectively outlawed stated-income loans in the mortgage market. Under the new requirements, mortgage lenders must take specific steps to ensure home buyers actually can afford the loans. If they don’t, homeowners can sue and potentially win damages that can dwarf the value of the homes. In auto lending, no such regulation exists.

Moody’s findings shed light on risks related to the boom in auto loans, which has contributed to pushing U.S. household debt past $12.7 trillion. While the market for the debt is much smaller than the subprime-mortgage market that triggered the Great Recession, regulators have grown concerned that lenders are taking advantage of borrowers and putting them in cars that they can’t afford. 

Riskier Loans

These risks are becoming more important to monitor, given lower financing margins, plateauing car sales and increased competition among lenders, which could increase risks in the market in the year ahead, according to Moody’s.

Moody’s compared bond deals issued this year by Santander Consumer and GM Financial’s AmeriCredit, which are the two largest issuers of bonds backed by subprime auto loans. Data tied to Santander show that it packaged riskier loans into bonds, as seen in higher loan-to-value ratios, longer maturities, more used cars, lower credit scores and a greater percentage of loans granted to borrowers whose incomes weren’t verified, Moody’s said.

Loans with low or no credit scores, no co-signer and no income verification made up about 9 percent of the total pool balance of Santander’s bonds, compared with less than 1 percent of AmeriCredit bonds, according to Moody’s.

A spokeswoman for AmeriCredit declined to comment.

Fraud Concern

Market participants have become concerned with rising fraud levels, and signs that borrowers are getting smarter at gaming their credit scores to make them appear stronger than they really are. As many as one in five auto-loan borrowers admitted in a recent UBS Group AG survey that their applications for debt contained inaccuracies. Santander Consumer recently convened with a dozen of its competitors to discuss how to combat rising fraud, Bloomberg previously reported.

Santander Consumer settled a lawsuit earlier this year with two U.S. states over allegations that it made loans to borrowers that it knew couldn’t afford them and that it overlooked inaccuracies such as inflated incomes in auto-loan applications. 

Around 42 percent of Santander Consumer’s subprime auto loans made between 2009 and 2014 by dealers identified as “high risk” in Massachusetts and Delaware have defaulted or will default, an amount that is substantially higher than the losses in the overall lending portfolio, Moody’s said in a separate report. “Information in the settlements indicate that some loans in these deals were underwritten based on inflated income and inflated value of collateral,” according to Moody’s.

Around 30 other states have also grouped together to seek information or subpoenaed Santander Consumer for information about its underwriting and securitization activities, according to the company’s most recent 10-Q filing.

(Updates with Moody’s rating in sixth paragraph.)

--With assistance from Rick Green Charles Williams and Adam Tempkin

To contact the reporter on this story: Matt Scully in New York at

To contact the editors responsible for this story: Nikolaj Gammeltoft at, Kenneth Pringle

©2017 Bloomberg L.P.