Calif. fines Santander Consumer for referral-fee violations

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Santander Consumer USA Holdings in Dallas has agreed to pay $300,000 to settle charges from California’s financial regulator that it violated consumer disclosure laws.

According to a consent order signed Friday, the subprime auto lender, a division of Santander Holdings USA in Boston, failed to properly disclose to borrowers that it received a fee for making referrals to CarMax, the used-car dealer.

The order covers financing arranged between 2011 and 2017 on, an online lending unit owned by Santander. During that period, Santander referred borrowers to CarMax and, in return, received $300,000 per month and $1,000 per car sold, according to a spokesman for the California Department of Business Oversight.

Santander did not disclose the referral arrangement to its borrowers, which is a violation of state law. CarMax is not named in the order, but was identified by the spokesman for state regulator.

Under the order, Santander agreed to disclose to borrowers that it receives a separate fee from the car dealer. Santander also agreed to stipulate that the fee does not affect the interest rate charged on its loans.

“The market works best when there is full transparency, so consumers can make full-informed decisions,” Jan Lynn Owen, commissioner of the Department of Business Oversight, said in a statement provided to American Banker. “Santander violated that principle. This settlement holds them properly accountable, and ensures they provide California borrowers adequate disclosures in the future."

Santander declined to comment. CarMax did not immediately respond for comment.

The consent order adds to the long list of compliance headaches at the subprime auto lender.

Santander has been the target of state and federal investigations in recent years, including an ongoing inquiry on behalf of 30 state attorneys general into its underwriting and securitization of subprime loans.

The auto lender has also been tripped up by accounting woes, and was forced to restate its financial results several times in 2016 due to problems with the way it calculated its loan-loss reserves, dealer discounts and troubled debt restructurings.

Scott Powell, the CEO of the parent company, took the helm at the auto lender last summer, replacing Jason Kulas. The leadership change was part of an ongoing effort by Santander Holdings USA to keep closer tabs on its auto business.

As of Dec. 31, Santander Holdings USA, a unit of the Spanish banking giant Banco Santander, owned approximately 68% of the subprime auto lender.

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