DALLAS–One of the biggest subprime auto finance companies in the U.S. said it verified income on just 8% of borrowers whose loans it recently bundled into bonds worth approximately $1 billion.
Moody’s Investors Service reported that Santander Consumer USA Holdings Inc. has confirmed it conducted the low level of due-diligence. The 8% figure compares with a different securitization sold by AmeriCredit, a unit of General Motors Financial, which said it performed income verifications on 64% of the loans it sold, according to Bloomberg.
The lack of checks is believed to be one of the primary reasons that bonds sold by Santander Consumer have had higher losses than other bonds, according to the analysis by Moody’s.
Andrew Kang, treasurer with Santander Consumer USA, told Bloomberg the company’s practice on income verification has been consistent over time even if it’s lower than levels reported among competitors. Santander said it protected investors by including extra loans in the securities in case some went bad, for example, creating a buffer against losses.
Moody’s rated the Santander deal as high as Aaa in February.
Moody’s said in a separate report that approximately 42% of Santander Consumer’s subprime auto loans made between 2009 and 2014 by dealers identified as “high risk” in Massachusetts and Delaware have defaulted or will default, an amount that is substantially higher than the losses in the overall lending portfolio.