Why Santander agreed to an $11.8 million settlement over auto lending

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WASHINGTON – Santander Consumer USA Holdings Inc., a premier subprime car loan, pays $ 11.8 million to meet claims that customers have been misled about the costs and conditions of car loans and insurance, said a US consumer watchdog on Tuesday.

Santander Consumer, a subsidiary of the Spanish banking group Banco Santander SA, promised drivers lower monthly payments by allowing them to make only interest payments without explaining that this would increase the total cost of the loan, according to the Consumer Financial Protection Bureau ( CFPB).

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The bank also did not explain to customers that an insurance 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 about the settlement in August.

Santander Consumer is one of the country's largest subprime car loans and manages around $ 52 billion in loans to 2.7 million customers, the lender has said.

Santander Consumer pays a $ 2.5 million fine and offers approximately $ 9.3 million in repayments to some drivers, even though the lender has not admitted any debt, according to the settlement.

"We are delighted to leave this matter behind us," the lender said in a statement on Tuesday. "Strengthening compliance and consumer practices has been an important focus of attention for us."

Santander Consumer said earlier that it stopped offering its GAP insurance product last year and updated its revelations to consumers.

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The CFPB fine is less than half of the $ 26 million fine that fined state officials in Massachusetts and Delaware a subprime lender in a separate settlement that was reached last year.

More than 70 percent of its customers are subprime borrowers who usually pay double-digit interest rates for commercial credit, according to US regulatory records and research from the rating agency Experian.

Drivers were able to reduce their monthly payments by about 40 percent under Santander's Temporary Payment Plan (TRIPP), which meant that they only paid interest for a while. But the CFPB discovered that the lender did not explain how interest paid payments would increase the life and cost of the loan.

The lender put the product on the market aggressively, according to the CFPB. More than 10 percent of Santander's borrowers tapped the program within a year of purchasing a car, according to a presentation by the investors in Santander.

Many borrowers who turned to the Santander Consumer for GAP insurance were surprised when they noticed that there was a limit to the total coverage, according to the CFPB.

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