Santander to boost auto loan controls

A Santander bank branch in New York.Mark Lennihan/Associated Press/File 2015

The Federal Reserve told Santander to strengthen oversight of its subprime auto-lending unit because it continues to fall short of state and federal consumer protection laws, the latest in a series of regulatory actions taken against the bank.

In an enforcement agreement released Thursday, the Fed said Boston-based Santander Holdings USA Inc. has two months to develop plans to improve board oversight, bolster senior management, and increase spending for staff to ensure compliance.

The Fed didn’t specify which consumer laws Santander violated, but in the agreement it highlighted that other agencies have cited the auto lender on grounds of failing to comply with regulations.

While Santander wasn’t fined, the bank’s problems must be serious to prompt the Fed to act, said Patrick Rohan, a managing director of bank consulting firm FinPro Inc. and former director of supervision in the Boston region for the Federal Deposit Insurance Corp.

The issues “must be fairly significant and fairly widespread,” Rohan said.

Santander has been working for the past year and half to strengthen its practices, said Ann Davis, a spokeswoman for the bank.

The auto-lending division, which makes up $38.5 billion of the bank holding company’s $137 billion in assets, has adopted new policies to identify and prevent dealer misconduct and has established an Officer of Consumer Practices to ensure that customers are treated fairly.

“The work necessary to address the new agreement is well underway and will not require a significant change to our plans,” Davis said.

The agreement, signed earlier this month, is the latest of several regulatory actions that Spain’s Banco Santander has faced in its US business. Earlier this year, the Office of the Comptroller of the Currency downgraded the bank’s rating in community lending.

The bank’s auto-lending subsidiary, Dallas-based Santander Consumer USA Inc., has been under scrutiny for several years. In 2014, the US Justice Department subpoenaed records from Santander Consumer, along with other lenders, in an investigation into possible fraud in the securitization of subprime auto loans.

In 2015, the Consumer Financial Protection Bureau found that some dealerships that originated loans that Santander bought may have marked up the costs based on race and ethnicity, violating fair-lending standards.

Subprime auto loans are made to consumers with substandard credit scores or limited credit histories.

Santander has shuffled its management team since 2015 to deal with its many regulatory issues. The bank hired outsider Scott Powell, a former J.P. Morgan Chase & Co executive, to head up its US operations.

The founder of the auto-lending division resigned in mid-2015 and the bank spent hundreds of millions to buy out his stake in the company.

“Improving risk management, compliance, and governance is a central focus,” Davis said.

She noted that the Fed said Santander has made improvements to its overall operation to comply with regulators since its last enforcement action in 2015. The auto-lending unit, however, remains a weak spot, the regulator said.

Much of what Santander will have to do to comply with the Fed’s agreement — such as establishing a code of conduct for employees to report suspected violations and periodic reviews of its products to ensure they comply with consumer laws — are fairly basic, Rohan said.

“This is pretty much Banking 101,” Rohan said. “There’s nothing exotic about it.”