5 Steps of Santander’s Compliance Revival

Santander Consumer USA has not had an easy two years when it comes to regulatory compliance.

In 2015, the company started getting hit with consent orders from the Federal Reserve for failure to pass a stress test. Later that year, the Department of Justice sent a consent order alleging the company violated the Servicemembers Civil Relief Act. Then, the Consumer Financial Protection Bureau notified the company of potential violations of the Equal Credit Opportunity Act.

In July 2015, just as the Federal Reserve Bank of Boston came down with its consent order, Thomas Dundon resigned as chairman and chief executive. In 2016, Jason Grubb, former president and chief operating officer of originations, and Brad Martin, former chief operating officer of servicing, would also leave the company. Both left to join to pursue an opportunity on the executive team at Exeter Finance Corp., Grubb told AFN. 

Santander is still paying for that era in leadership with a $26 million written agreement with the Federal Reserve Banks of Boston and Delaware in March of this year that stretches back to allegations made in 2015.  

That consent agreement reflects practices of the past, not the present, Santander Consumer’s Chief Executive Jason Kulas told Auto Finance News during a meeting at the company’s Dallas office in early June. He detailed some of the changes the company has made since 2015 to institute a culture of compliance and focus on areas needing future improvement.

Here are five things Auto Finance News learned about Santander Consumer USA’s revamped compliance program.

1. Fostering a Culture of Compliance

Listening to Kulas discuss the company’s strategy, it’s hard get more than a few sentences deep without hearing about how it integrates a culture of compliance.

“We think a culture of compliance and focusing on consumer practices is really consistent with and a big driver of shareholder value — we think these things are all very closely connected,” he said. “A lot of times people talk about the regulatory environment as something that gets in the way, something that’s hard to deal with. But that’s not how we think about it. It’s really critical for us, because we think it’s going to be a differentiator in the future because not everyone is going to be able to get to the level we need to get to as an industry.”  

Developing a robust compliance program requires “massive investment,” Kulas said, which Santander, as opposed to some other players, can afford at the moment. The company has more liquidity today than it did going into the financial crisis and Kulas plans to use this time to make the investment when others won’t.

“We know the resource it takes to build up all your lines of defense: To have a control structure in place, to have proper validation of the models you use, to have the process in place, to have documentation of everything, and to invest in people who have what we call ‘know what good looks like,’” he said. “If it comes down to one thing it’s putting the consumer at the center of what you’re doing and making sure you’re setting up the consumer for success.”

Santander is being tested on its ability to have disciplined underwriting that doesn’t put consumers in loans they can’t afford, and the lender is willing to sacrifice loan volume to make sure it stays compliant. In the first quarter Santander saw a 21% decline in originations, following fourth quarter 2016 declines of 24%, according to the company’s earnings.

“You have to be able to accept the results and the results are you get less business,” Kulas said. “If we were ignoring the status of the consumer, putting people in loans that weren’t appropriate for them, and just chasing volume, then we wouldn’t have had substantial year over year decreases in volume. We’ve got decreases in volume because we’re holding the line on all the structural elements we think are appropriate for long-term success.”

2. Income Verification 

Income verification doesn’t rank high among those structural elements Kulas is holding the line on. Santander received criticism when a Moody’s report revealed that the lender verified income on just 8% of loans in its first securitization of the year, compared to 64% in a similar recent subprime issuance from General Motors Financial Co.’s AmeriCredit Corp. unit.

“You can verify income, and in certain cases we have a very detailed program we go through that determines whether or not we stipulate for proof of income, but it’s so much more than that,” he said. “You look at the structural elements of the deal, you look at loan to value, you look at the payment to income, you look at the dollar amount of the payment, you look at the down payment. There are a lot of structural ways you can take a look and make sure that you’re setting up the consumer for success.”

S&P Global actually found evidence that supported those claims. Loans in Santander’s securitizations that were not verified for income had a higher average weighted Fico and lower loan to value ratios, Amy Martin, lead analyst for auto ABS at S&P, said during a presentation at the Nonprime Auto Financing Conference.

“Based on that and other data we looked at, we do believe this income verification process is on a risk determined basis — where there is more risk with the consumer or the structure of the loan, the verification is still being done,” she said. “Still, this is a concern for us because income verification has been one of the underlying tenets of successful underwriting in subprime ABS.”

3. The New Office of Consumer Practices

The March consent order from the Reserve Banks of Massachusetts and Delaware cited thousands of loans that were funded without a reasonable basis to believe borrowers could afford them. But that case happened before these compliance improvements, Kulas said. So what has changed?

“One of the things we did is we established an office of consumer practices,” he said. “This is a division within our company, that has prominence at our company and has a seat at the table, and is integrated into every part of our business just like our compliance team, but it’s distinct and separate from our compliance team.”

Investments are made into both of these divisions, but the office of consumer practices is tasked with evaluating whether or not internal best practices meet the company’s standards, and furthermore how to best remedy it, Kulas said.

For example, the lender recently lowered its fees for late payments, because, although it may have been compliant with the law, it wasn’t inline with the culture of compliance the company is aspiring to.

“Is there an impact on our fee income over a period of time? Absolutely, because our fees are either not there any more or are lower than they used to be,” Kulas said. “But we think that puts us in this virtuous cycle as well. Not only is it the right thing to do, but we think over time our customers have a better experience with us, they want to come back, they want to do more business with us. This ties into long-term success in shareholder value, even if in the short term there appears to be a cost to it, if you are purely looking at the economics.”   

4. Dealer Fraud

Santander has also beefed up its dealer performance management process in order to limit fraud, stay more compliant at the dealer level, and ensure good relationships.

“That’s a big unit inside our company that we’ve been growing and adding resources to,” Kulas said. “There are quantitative aspects driving our dealer performance management program that are very important, but we’ve added a lot of qualitative aspects to that as well — looking at complaints for example.”

Additionally, in May six of the nation’s top 10 and nine of the nation’s top 20 automotive lenders met at Santander’s Dallas office as part of a newly formed fraud consortium. The lenders will share information on dealer fraud in order to reduce the $6 billion lost across the industry last year.

“What comes out of it ultimately is going to be a reduction in fraud, the specific ways we approach that is what we’re still getting together to discuss,” Kulas said. “It’s bad for consumers it’s bad for people trying to lend in the industry, it’s bad for dealers who are victims of this in many cases as well. If we can do something to reduce it, we’re all in.”  

5. Leveraging Technology

Big data is going to play a more prominent role in Santander’s compliance program moving forward.

“Big data can tell us a lot of things about the propensity of how a certain type of conversation lead to a good outcome for a customer or a bad outcome that leads to a complaint,” Kulas said. “Clearly we want the former not the latter and so we have a lot of people focused on leveraging big data for that.”

This is an early compliance application for big data that will make a quick impact, but Kulas said it will “be so much more than that” over time.

“I can’t say for any one of [these initiatives] that we’ve arrived to the ultimate state of where we feel we’re on top of everything, and in the dynamic world we live in, I’m not sure we’ll ever be able to say that,” he said. “But we’ll continue investing and making them better every single day, and I think we’ll get positive outcomes.”

Correction: A previous version of this story misstated the timing of Jason Grubb and  Brad Martin’s departure from Santander. Grubb’s statement about his departure was also added.