Santander Consumer is the next bank to be targeted by the Department of Justice investigation of subprime underwriting and securitization, the lender revealed in its second quarter regulatory filing today.
The DOJ under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), is investigating Santander’s underwriting and securitization of nonprime auto loans since 2007.
It’s the second subprime auto lender targeted by the DOJ this week. On Monday General Motors said that it too would be required to turn over documents related to its subprime auto-lending under a subpoena issued by the DOJ, the lender disclosed in a regulatory filing Monday.
GM's car-financing unit said it received the subpoena July 28 in connection with a federal investigation of subprime auto loans dating to 2007. The statement said the request was "in contemplation of a civil proceeding for potential violations of Financial Institutions Reform, Recovery, and Enforcement Act of 1989."
In a statement Monday, GM Financial said "our understanding is that the request is focused on the subprime auto finance space in general. There are no allegations set forth in the subpoena and GMF is cooperating with the request," indicating that that the subpoenas are a product of a larger DOJ investigation into subprime auto lending practices.
“[Santander Consumer's] commentary regarding the DOJ subpoena is consistent with GM Financial Company’s disclosure of a similarly-focused subpoena,” according to a Compass Point Research and Trading report. “We believe that recent FIRREA successes have emboldened the DOJ to more broadly and aggressively pursue FIRREA investigations. SC’s receipt of a subpoena reinforces our view that the DOJ is undertaking an industry-wide review of auto ABS practices.”
The DOJ has secured settlements with JP Morgan and Citigroup under the threat of FIRREA prosecution over the sale and issuance of RMBS . On July 31 the DOJ secured a $1.3 billion penalty from Bank of America stemming from FIRREA claims against Countrywide.
However Compass Point analysts said that the investigations "won’t pose a material risk to subprime auto lenders given the strong performance of auto ABS, the contractual recourse for indirect auto lenders when loans are improperly originated, and the limited scope for standing of FIRREA claims".
Other regulatory efforts such as the Consumer Financial Protection Bureau’s (CFPB) “larger participant” rulemaking could have a more lasting impact on the industry. This rulemaking would extend the CFPB’s existing supervisory authority to non-bank lenders and captive auto lenders not currently under the CFPB’s jurisdiction.