Subprime auto lender Santander ramps up sales here

More Texans are taking on more debt, and by one measure — auto loan balance per capita — they easily have the highest burden in the country.

The question is whether too heavy to handle.

Delinquency rates are climbing, especially among subprime borrowers, who have to pay higher interest rates.

At the end of 2018, almost 5.4 percent of auto loans in Texas were at least 90 days late, and the numbers in Dallas County were even worse, according to the Federal Reserve Bank of Dallas. Delinquency rates were almost twice as high as before the Great Recession.

So are lenders tapping the brakes?

Not Santander Consumer USA, one of the country’s largest auto lenders. The Dallas-based operator originated $8.4 billion in car loans and leases in the quarter ended in September, an increase it’s of 11 percent.

“We probably have 30 Ph.D.s who work here, and we dig through our data at a very granular level,” said Scott Powell, CEO of the company. “We have our radar fully switched on to look for changes in consumer payment patterns — and we don’t see it.”

There are plenty of signs of distress among Santander customers, but that apparently comes with the territory. Over 8 in 10 Santander car loans are made to subprime borrowers who don’t qualify for conventional financing. Often they have low incomes and can’t make sufficient down payments.

This describes many people in America, roughly 40 percent of potential customers, Powell said. And they need cars for work and family life. In Texas, a car or truck is practically a necessity — and Texas is easily Santander’s No. 1 market, with $5 billion in car loans.

“We love doing business in Texas,” Powell said.

In the first nine months of the year, Santander Consumer earned $848 million on almost $5.9 billion in finance and interest income. It also took more than $1.5 billion in credit losses, an indication of the business risks.

The company wrote off over 18 percent of retail car loans in the third quarter, higher than last year. Think about that: Almost 1 in 5 loans didn’t work out.

In addition, over 14 percent of borrowers were at least a month late on payments, and the company was restructuring $4.2 billion in troubled loans.

Both the late payments and troubled loans actually represent improvements, and executives are proud of the progress.

“We’ve upped the standards,” said Ana Botin, executive chairman of Madrid-based Banco Santander, the largest bank in Europe.

In 2006, Santander bought the Dallas subprime auto lender then known as Drive. Entrepreneur Tom Dundon had built a great business at Drive, Botin said, and he continued to lead it until 2015. But Botin wanted wholesale changes after the company ran into many regulatory problems and investigations.

Botin replaced the board and management teams, both in Dallas and at Santander’s retail bank in Boston. She recruited executives from banking giants, such as Bank of America, Wells Fargo and JPMorgan Chase, where Powell had been former head of consumer banking.

Santander Consumer is still digging out from past mistakes. In the latest quarter, it took a $126 million reserve against a rash of legal and regulatory liabilities. They include an investigation by a committee of 33 state attorneys general and a suit by the Mississippi AG alleging that Santander pushed loans that consumers couldn’t afford.

“We’re trying to do the right thing,” said Botin, who attended a Thursday meeting with workers in the company’s headquarters in downtown Dallas. “For employees, for customers, for shareholders, for communities. We need to find a balance between all these stakeholders.”

Santander Consumer is earning about 15 percent return on equity, down from about 22 percent before it began tightening financial controls and increasing compliance, Botin said. She pointed to that metric, along with a rising stock price, as evidence of a better operation.

“We’re running it in the right way, in a sustainable way,” she said.

But consumer advocates have a different take. Auto finance companies like Santander do not advertise to car buyers. They sell to car dealers, which offer financing options to their customers — often at higher rates or with other add-ons.

“They can talk about competing for customers, but they’re really trying to charge as much as they can,” said Ellen Harnick, western office director for the Center for Responsible Lending, an advocate for a fairer financial marketplace.