WASHINGTON (Reuters) - Santander Consumer USA Holdings Inc (SC.N), a leading subprime auto lender, will pay $11.8 million to settle claims that it misled customers about the cost and terms of auto loans and insurance, a U.S. consumer watchdog said on Tuesday.
Santander Consumer, an affiliate of the Spanish banking group Banco Santander SA (SAN.MC), promised drivers lower monthly fees by allowing them to make interest-only payments without explaining this would increase the total cost of the loan, the Consumer Financial Protection Bureau (CFPB) said.
The bank also failed to explain to customers that an insurance policy known as “guaranteed auto protection” (GAP) would not always cover the costs of replacing a car that was destroyed in an accident.
Reuters first reported details of the settlement in August.
Santander Consumer is one of the nation’s largest subprime auto lenders and manages about $52 billion in loans to 2.7 million customers, the lender has said.
Santander Consumer will pay a $2.5 million fine and provide about $9.3 million in refunds to some drivers although the lender did not admit guilt, according to the settlement.
“We are pleased to put this matter behind us,” the lender said in a statement on Tuesday. “Strengthening compliance and consumer practices has been a key focus of ours.”
Santander Consumer has previously said it stopped offering its GAP insurance product last year and has updated its disclosures to consumers.
The fine from the CFPB is less than half the $26 million penalty that state officials in Massachusetts and Delaware fined the subprime lender in a separate settlement reached last year. (reut.rs/2ON2Gm6)
More than 70 percent of its customers are subprime borrowers who typically pay double-digit interest rates for car-buying credit, according to U.S. regulatory filings and research from credit rating agency Experian.
Drivers could lower their monthly payments by about 40 percent under Santander’s Temporary Reduction in Payment Plan (TRIPP), which allowed them to pay interest only for a time. But the CFPB found that the lender did not explain how interest-only payments would expand the life and cost of the loan.
The lender marketed the product aggressively, the CFPB found. More than 10 percent of Santander borrowers tapped the program within a year of a car purchase, according to a Santander investor presentation.
Many borrowers who turned to Santander Consumer for GAP insurance were surprised to find that there was a cap on the total amount of coverage, the CFPB also found.
Reporting by Patrick Rucker; Editing by Lisa Shumaker