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Under The Hood Of A Subprime Lender Accused Of Illegally Repoing Soldiers' Cars

Santander Consumer — a unit of one of only two banks to receive the dubious honor of failing the Fed’s stress tests yesterday and the market leader in subprime auto lending — allegedly ignored a law that requires lenders to obtain a court order before repossessing cars from members of the military and will now pay $9.35 million to settle the issue with the government. Apparently, Santander illegally repoed nearly 800 vehicles from active service members over the course of 5 years and then attempted to extract fees from some 350 additional soldiers in connection with repossessions the bank didn’t even execute. 

From the NY Times:

The law, called the Servicemembers Civil Relief Act, recognizes that military members have to upend their lives, often at a moment’s notice, sometimes leaving their finances in peril. By requiring lenders to first obtain a court order, the law provides service members with a chance to delay or contest repossessions.

 

But Santander Consumer, prosecutors said, failed to get those court orders, leaving service members, including some who were deployed thousands of miles away, to fight at home and abroad. Prosecutors said that the lender’s repossessions stretched over roughly five years, from January 2008 until February 2013. Santander, prosecutors said, completed 760 repossessions against service members protected under the relief act.

 

The case, filed in Federal District Court in Dallas, also accused Santander of going after an additional 352 service members for fees that stemmed from illegal repossessions started by other lenders.

This is the same Santander Consumer that was subpoenaed last year by the Justice Department in connection with its packaging of subprime auto loans into ABS and whose lending practices also got the attention of the New York Dept. of Consumer Affairs. 

Don’t think for a second that any of this is slowing down the Santander Consumer subprime auto securitization machine though. The company, which leads all other lenders when it comes to the total amount of subprime auto loan debt outstanding, has already done a deal this year worth $1.2 billion which accounts for nearly 25% of all subprime auto ABS issuance YTD. The details of that deal are below — note the average FICO score of 595, the average term of 70 months, the average APR of nearly 17%, and the breakdown which shows that more than two thirds of the loans were for used cars.

Santander Consumer is the market leader… 

Details of the $1.25 billion SDART 2015-1 deal…

The prospectus for this deal has all sorts of fun language regarding risks and also includes a handy table showing average FICOs, loan terms, etc. for the company’s previous securitizations.

From the SDART 2015-1 prospectus

Substantially all of the receivables in the receivables pool are subprime receivables with obligors who do not qualify for conventional motor vehicle financing as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While each originator’s underwriting guidelines were designed to establish that, notwithstanding such factors, the obligor would be a reasonable credit risk, the receivables pool will nonetheless experience higher default rates than a portfolio of obligations of prime obligors. In the event of such defaults, generally, the most practical alternative is repossession of the financed vehicle. As a result, losses on the receivables are anticipated from repossessions and foreclosure sales that do not yield sufficient proceeds to repay the receivables in full.

 

Since July 2014, SCUSA has received civil subpoenas and civil investigative demands from various federal and state agencies, including from the U.S. Department of Justice under the Financial Institutions Reform, Recovery and Enforcement Act, the United States Securities and Exchange Commission and several state attorneys general, requesting the production of documents and communications that, among other things, relate to the origination, underwriting and securitization of auto loans for varying time periods since 2007. 

Finally, here are 60-day delinquency rates by vintage, which pretty clearly show that most of these issues have a date with double-digits sooner or later…

Not wanting to waste any time getting back to market, Santander is now prepping a deep subprime deal called DRIVE 2015-A, which looks even worse than previous offerings and is 13% backed by loans to borrowers with no credit score whatsoever. 

Via Structured Finance News

The $712 million DRIVE 2015-A is backed by a pool of loans with an average FICO of 552 (12.9% of borrowers in the pool don’t even have a FICO) compared with 595 for the most recent SDART transaction, completed in February. The loans backing

 

DRIVE 2015-A pay, on average, an annual percentage rate of 19.16%, approximately 3.0 percentage points higher than the February SDART transaction.

DRIVE 2015-A is also backed by loans with slightly longer terms that average 5.8 years compared to the 5.5 year terms in the latest SDART pool. Approximately 5.22% were more than 61 days delinquent, as of December 31, 2014.

 

Nevertheless, both Standard & Poor’s and Moody’s Investors Service have assigned a preliminary ‘AAA’ rating to two senior tranches that benefit from initial overcollateralization and subordination of 64.5%.

 

DRIVE  2015-A marks a return to the deep subprime space for Santander, which last issued a deal backed by deep subprime borrowers in 2008...

 

Since the collateral in DRIVE is much weaker than previous subprime transactions sponsored by the issuer, Moody’s expected loss for the pool is 27%, or approximately 10% higher than for transactions issued under the SDART platform.

 

The recent spate of regulatory probes into subprime auto lending and securitization hasn’t really impacted appetite for these higher yielding loans. Issuers have maintained a regular calendar of issuance since the Department of Justice first initiated investigations into subprime auto financing targeting GM Financial and Santander, in August 2014. Since then, another six issuers have been targeted by investigation led by the DOJ and the CFPB.

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We would reiterate here that all of the above serves to validate what we’ve been saying for months now about the subprime auto market specifically and about surging US auto sales more generally. At the margin, growth is being fueled by loans to risky borrowers and lenders are encouraged to make these loans by a Wall Street securitization machine that is just now starting to heat up again after taking a well-deserved post-crisis rest. The only question now is whether regulatory action aimed at tightening lending standards is just around the corner and whether the recent move by Wells Fargo to cap loans to underqualified borrowers serves as a model for other lenders to curb lending in the subprime space. 

Charts: Deutsche Bank