The New York City consumer affairs department said on Friday that it was investigating whether dealerships that sell used cars may have misled low-income borrowers into taking out expensive loans with hidden fees.
The agency announced that it had issued subpoenas to two subsidiaries of the Spanish bank Banco Santander, which together are among the country's largest originators of auto loans. Dealers often arrange such loans, making them the focal point for car buyers, but they are required to disclose the lender's interest rate and other add-ons.
The move comes amid increased regulatory scrutiny of the subprime auto lending industry, which critics say takes advantage of vulnerable borrowers who often have to pay steep rates for the loans. Subprime loans have ballooned since the financial crisis in a flurry that bears some of the hallmarks of the mortgage market before the 2008 financial crisis.
Julie Menin, the commissioner of the department, said that her office suspected that some of the city's more than 800 dealerships that sell used cars were singling out consumers with low credit scores and incomes for loans with high interest rates and poor terms.
"For many families, especially those with low incomes, a car is one of the biggest purchases they make," Ms. Menin said in a statement. "If they are looking to a subprime loan, it's because they are already struggling financially."
Ms. Menin's office issued the subpoenas to Santander Consumer USA Holdings Inc. and Santander Consumer Funding 3 L.L.C. Financing purchases of used cars makes up more than two-thirds of their outstanding installment loans, of which 88 percent are subprime, according to Santander USA's 2013 annual report.
The department did not identify any dealerships that it suspected of illegal lending practices. If it does find violations, the city agency could levy fines as penalties.
Like banks that issued mortgages to risky borrowers before the financial crisis, some auto lenders have been criticized for making loans to borrowers regardless of their ability to pay. Signs of strain have already appeared. Santander Consumer USA's managed portfolio "has worsened with rising delinquencies, repossessions, and net losses," according to a report from the rating agency Standard & Poor's in September.
Santander Consumer USA declined to comment.
While Santander can lend directly to consumers, dealerships arrange loans for the 80 percent of car buyers who need financing. The dealerships, however, are not required to disclose what percentage of the total interest rate goes to them as a fee. The practice has worried consumer advocates and regulators, who say that a dealer's discretion to determine what to add on to an interest rate, without disclosure, has fostered discriminatory lending practices aimed at minorities and low-income borrowers.
In August, General Motors' finance subsidiary disclosed that it had received a subpoena from the Justice Department for documents related to its subprime lending business going back to 2007. Santander Consumer USA has also received similar subpoenas.
Source : http://dealbook.nytimes.com/2014/11/14/new-york-agency-investigates-auto-loans/
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