The subprime auto-loan business of Santander Holdings USA Inc. has agreed to provide $5.4 million in financial relief to several hundred Massachusetts consumers, primarily in lower-income communities, for charging them higher than allowed interest rates.
Under the settlement, announced Thursday, the lender will eliminate interest charges on the remaining balances of the loans of 450 customers and reimburse them for interest payments they made. The average relief to these consumers, many of them in Boston, Worcester, Springfield, Pittsfield, and Lowell, will be $11,000, according to Attorney General Maura Healey.
"Consumers need to know that when they take out a loan, they will be treated fairly," Healey said in a statement. "It is important that protections under state law are properly applied, especially when it comes to economically disadvantaged consumers in Massachusetts."
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Santander Holdings USA, the US subsidiary of the Spanish financial services giant Banco Santander SA, is headquartered in Boston. Its subprime auto-loan business, which lends to borrowers with poor credit histories, is called Santander Consumer USA Holdings Inc.
Santander Consumer discovered that some of its Massachusetts auto loans had interest rates above the state cap of 21 percent during a self-audit earlier this year and notified Healey's office, the company said in a statement. Under the agreement, Santander admitted no wrongdoing.
Most of the loans at issue were made this year. Santander said it changed its systems to ensure that Massachusetts loans don't exceed the limits.
"We are committed to treating our customers fairly and ensuring we comply with the law," the company said. "We did not live up to our standards in this instance."
Santander's subprime auto-loan business has come under state and federal regulatory scrutiny in recent years over concerns about possibly discriminatory lending practices and the granting of loans with high interest rates to borrowers who may not be able to repay them, as occurred in the run-up to last decade's housing crisis.
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Healey's office has an ongoing investigation into Santander's auto-loan business, as do other state attorneys general and the US Department of Justice. Santander has said that it is cooperating with the investigations and that its policy is to comply with all laws.
At issue in Thursday's settlement was how Santander accounted for optional insurance that consumers purchased when they bought cars. If a driver gets into an accident, the insurance, called guaranteed auto protection, or gap coverage, pays the difference between what a driver owes on a car loan and the amount covered by a traditional auto insurance policy.
It can help drivers who are leasing cars or buying them with small down payments and has become increasingly popular as consumers buy more expensive vehicles and put less money down, analysts said.
Santander traditionally prohibited this insurance coverage in its auto-loan agreements in Massachusetts but decided to change the policy in 2014, according to the settlement. In February, the lender bought loans that included the gap insurance, which, when added to the other costs of the loan meant that consumers were paying more than the 21 percent interest allowed by state law, according to the state's complaint.
Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.