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Santander Consumer USA, the Dallas-based consumer car-loans unit of Spain’s biggest bank, will pay a total of $26m to resolve two states’ claims that it funded unfair, high-interest loans to buyers when it should have known a large portion were at risk of default.

The settlements announced Wednesday end an investigation that started several years ago into Santander’s car-loans business by the attorneys general of Delaware and Massachusetts. The states accused it of violating consumer-protection laws with regard to its underwriting practices and car dealer management between 2009 and 2014.

According to the states, Santander relied on information from car dealerships about borrowers’ income that it should have known was inflated in certain cases, resulting in some borrowers taking on loans they could ill afford. Despite knowing that some dealerships had a high default rate for past loans due to inaccurate or inflated borrower information, Santander continued to buy loans from them, and in some cases sold those on to third parties, the states said.

A spokeswoman for Santander, which neither admitted nor denied the allegations, said in a statement:

“We are pleased to put this matter behind us so we can move forward and continue to focus on serving our customers. Santander Consumer is totally committed to treating customers fairly. In the last 18 months, our new management team has taken significant steps to strengthen our business practices and controls. Today’s voluntary agreement with the Attorneys General of Delaware and Massachusetts, which resolves an investigation dating back several years, is another important step forward in that process. We will continue to strengthen our business controls and dealer management program while ensuring that we are focusing on best-in-class consumer practices.”

Delaware’s attorney general, Matt Denn, in a statement said the settlement “results in significant consumer relief and provisions that will prevent similar misconduct in the future.”

Recently, Santander has hit the brakes on its subprime auto lending business, cutting originations by a quarter and pumping up its reserves as it pulls back from a “heated” market. Regulators have sounded a warning on underwriting standards in the $1.14tn sector, where low interest rates, unemployment and fuel prices have stirred demand.

Copyright The Financial Times Limited 2017. All rights reserved.
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