PhotoDuring the housing bubble, millions of homebuyers with iffy credit got stuck with subprime mortgages that, in many cases, turned out to be unaffordable.

In the end, it nearly brought down the financial system.

Subprime mortgages are less common now, but subprime loans have not disappeared. They're increasingly common in auto lending.

In Massachusetts, one subprime auto lender, Santander Consumer USA Holdings Inc., will pay $22 million to settle charges from an investigation into its lending in the state.

Unfair and unaffordable

“After years of combating abuses from subprime mortgage lenders, these practices are unfortunately familiar,” said Massachusetts Attorney General Maura Healy. “We found that Santander, a leading player in the business of packaging and reselling subprime auto loans, funded unfair and unaffordable auto loans for more than 2,000 Massachusetts residents.”

Healy says Massachusetts is the first state to reach a settlement relating to subprime auto loans. She said the settlement will provide relief to affected consumers and make future abuses less likely.

Much like the subprime mortgage fiasco, Healy said her investigation found that loans were being made to consumers without a reasonable basis for belief they could be repaid.

Healy alleges that Santander actually predicted that many of the loans would default, and also realized that financial information submitted by applicants was fictional, or at best inflated.

How it worked

Here's how it worked: a consumer found a car at a dealer they wanted to buy. The dealer offered financing, even though the buyer's credit was bad. Regardless, non-dealer institutions like Santander bought the loan and repackaged it, selling a bundle of these loans as securities to investors.

In 2008, when thousands of subprime mortgages went into default, it destroyed the value of those securities and nearly brought down investment banks, while drastically reducing the value of real estate.

Could subprime auto loans be as big of a systemic risk? Economists say it's unlikely, since repossessed vehicles are more easily resold than houses. But it certainly is a financial catastrophe for the consumers who lose their cars.

Healy faulted Santander for what she termed a lack of oversight. She said the bank's own internal audit raised warning flags, concluding that its oversight of the dealers making these subprime loans was inadequate.

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