S&P Confirms Santander’s Income Verification Claims, Still Expresses Concern

The lack of income verification in subprime auto loan securitizations is a “concern” for the consistency and performance of the market, but an analysis of Santander Consumer USA’s issuances shows that it’s being done on a risk adjusted basis, Amy Martin, lead analyst for auto ABS at S&P Global, said during a presentation at the Nonprime Auto Financing Conference earlier this month.

In Santander’s first subprime auto securitization of the year the company verified income on just 8% of loans compared to 64% in a recent issuance from General Motors Financial Co.’s AmeriCredit Corp. unit, and 100% verification from many other subprime securitizers, Martin said. Chief Executive Jason Kulas stressed to Auto Finance News that several other credit elements factor into the underwriting and S&P was able to independently confirm those claims.

For example, on Santander’s second issuance of the year income was verified on 13% of loans with a weighted average Fico of 572, Martin said. Loans that did not have income verification had a higher average weighted Fico at 615 and also had lower loan to value ratios.  

“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.”

There is a public perception held over from the 2008 financial crisis in which people think securitizers like Santander are offloading the risk to someone else, but this is not the case, Kulas said.

“The large majority of what we securitize stays on our balance sheet,” he said. “It’s just financing, we retain the equity, we retain the first loss position.”

For example, if recovery rates hypothetically fell to 50%, Santander would be losing half of what it’s owed on every default, Kulas said.

“That’s a problem for our business if we’re putting people in a bunch of loans they can’t afford, because when that happens they are more likely to default and when they default we lose too,” he said. “So I want to stress the point that it’s both, we care about doing the right thing for the consumer and our interests are aligned with the consumer — the combination of those two things means we have to be focused on all the structural elements that set the consumer up for success. One of many is proof of income.”