Major subprime auto lender rarely verifies borrower income

Inside Subprime: May 25, 2018

By Caroline Thompson

When someone applies for a loan to buy a car, they must disclose their income so that the lender knows they have a way to make their payments on time. But for people in desperate need of a set of wheels, it might be pretty tempting to inflate that number to improve their chances of being approved for the loan.

You might expect this kind of deceit would be easily caught. After all, don’t all lenders do the legwork to actually verify a potential borrower’s income before they approve them for a loan? Apparently, the answer is no. According to an S&P presale report, one of the biggest subprime auto lenders in the country, Santander Consumer USA, verified the income of just 13.8 percent of borrowers in a September 13 auto bond loan sale.

This might seem like a company oversight, but it’s actually not uncommon. In the subprime lending industry, verifying borrower income is actually kind of a hindrance to making a profit. Especially when it comes to payday loans and title loans, lenders who offer short-term, high-interest loans often don’t want borrowers to be able to pay back their loans in full, at least not right away. The more a borrower rolls over their loan, the more interest and fees they can stack on to the original amount. That’s how you get stories of people paying back $1,500 on $300 loans. While payday lenders will soon be forced to verify borrower income due to an Obama-era resolution that’s set to take effect in 2019, auto lenders aren’t covered in that rule.

Laurie Kight, a spokeswoman for Santander, acknowledged that the lender rarely verified borrower income, but defended the practice.

“Verifying a subprime borrower’s income for an auto loan is neither the sole nor most precise predictor of future credit performance,” said Kight. “Credit risk is indicated by a borrower’s credit score, loan terms, annual percentage rates, and loan-to-value ratios.”

According to an article from Bloomberg, Santander and other large auto lenders like GM Financial have, in recent years, created new models for vetting borrowers that don’t require income verification as a variable. But Santander is still an outlier when it comes to the amount of customers it verifies. GM Financial may use a similar model to Santander, but according to a June report from Auto Finance News, they still verify 64 percent of all borrowers’ income.

To learn more about predatory lending in the U.S., check out these related pages and articles from OppLoans: