DALLAS -

Before reaching a settlement with the Massachusetts attorney general who alleged the finance company charged “excessive” interest rates on its subprime vehicle installment contracts, Santander Consumer USA chief executive officer Jason Kulas discussed three specific industry-wide factors that impacted its third-quarter performance.

During Q3, SCUSA reported that total originations came in at more than $7.6 billion, a figure including $3.1 billion in Chrysler Capital retail loans and $1.6 billion in Chrysler Capital leases originated. Other originations, including other auto and personal loans, totaled $2.9 billion for the third quarter.

The company pointed out incentives on certain vehicle models drove strong prime auto originations in the third quarter.

But during Santander’s conference call after sharing its Q3 financial report, Kulas indicated the overall market overall has become “slightly” more competitive, particularly in the lease segment. He acknowledged some competitors are being more aggressive in all-in lease pricing.

Then, Kulas elaborated about two other factors SCUSA contends to have influenced its origination performance.

“We also want to remind everyone we put a lower cap on our rates for dealer compensation in October 2014. We believe this is a competitive disadvantage on certain deals that are closed among bidders as many of our top competitors allow higher dealer mark-up levels,” Kulas said during the portion of the call that included his prepared remarks.

“We’re also seeing increased pricing competition in some areas of non-prime,” he continued. “While we remain disciplined in our origination approach, we are also being more cautious given market conditions. However, we continue to have confidence in our ability to originate attractive assets that meet our return hurdles.”

More discussion about subprime market

The comments Kulas made during his prepared remarks triggered several follow-up questions from the investment community during SCUSA’s Q3 call. Analysts wanted more details since so much of Santander’s business is tied into the non-prime and subprime segments of the credit spectrum.

“Early this year, we had a nice pick up in non-prime originations. In this quarter, we gave a little bit of that back,” Kulas said. “Our capture rates in non-prime fell back a little bit as there were some price competition. We intend to take what the market gives us.”

When asked about the about the depth and duration of competition in the non-prime space and elsewhere, Kulas called it “a little bit of a developing story.” Kulas also made a reference to another finance company but did not specify the name of the operation.

“We’re encouraged by the stability of performance we're seeing, and that's where you tend to see competition sort of impact things over a longer period of time,” Kulas said. “The performance is really coming in very stable and in line or close to what we have expected.

“But we are looking at some things on the competitive front that we're watching very closely, and I would pick out one individual competitor across the board,” he continued. “But what we're seeing is on lease in general. What's happening is, as we look at the individual transactions of what appears to be happening is, people are taking a little bit more aggressive view on residuals and may be partially offsetting that with what they view on fees and the money factor rate in those kinds of things.”

No matter what might be happening in the underwriting departments at SCUSA and elsewhere, Kulas remains confident about his operation’s standing in non-prime and prospects going forward.

“We tend to talk about the core, non-prime auto part of our business as a mature business,” Kulas said. “We’ve had some success this year growing that business, and we’ve captured really wide net and we get that business from many different sources. “It’s a business that we like them and will continue to be a big driver for us.

“We don’t think of that business is a growth business,” he continued. “I would say outside of some new partnership that may come along a new proprietary flow of applications, those kinds of things. We just view it as real solid, high-performing business, and the way we maintain that is that is continue to be as conservative and rational and in our approach to pricing and structuring as always have been.

“What we see right now is we’re booking a good percentage of that business,” Kulas went on to say later in the call. “It’s slightly lower than it was in the second quarter, but it's still very solid and so we just have to watch it.

“We can’t really project exactly what's going to happen from this point forward,” he added. “We’ve seen the competitive environment stay fairly rational. We have no reason to believe that's going to change in any great way, but since we saw slight change, we wanted to mention it.”

Update on credit losses

SCUSA indicated its provision for credit losses increased to $744 million in the third quarter up from $739 million on a sequential basis but down from $770 million year-over-year. The company noted its allowance ratio decreased to 11.8 percent as of Sept. 30, down from 12.4 percent as of June 30 and 12.1 percent as of the close of the third quarter.

Executive also mentioned they removed the volatility associated with seasonality from its loss provisioning model for individually acquired auto retail installment contracts. They explained the impact of removing seasonality from the loss provisioning model was a $134 million decrease in the provision for credit losses and the credit loss allowance.

“Following extensive analysis on the methodology of our provisioning models, we have refined the model to remove volatility associated with seasonal assumptions, leading to a one-time reduction to provision expense,” interim chief financial officer Jennifer Davis said.

“It is important to note that under the prior methodology, this quarter’s provision expense would have been higher, and we likely would have seen a reduction in the provision line in the upcoming fourth quarter,” Davis continued. “However, due to the change we made this quarter, the seasonal benefit historically seen in the fourth quarter provision is not expected to occur. Similarly, all future quarters should not be impacted by seasonality assumptions in the provisioning process.”

Matter in Massachusetts

A week after sharing its Q3 performance, SCUSA agreed to provide $5.4 million in relief to more than 450 Massachusetts consumers over allegations that it charged excessive interest rates on its subprime auto loans, according to attorney general Maura Healey.

Under the terms of the assurance of discontinuance filed in Suffolk Superior Court, SCUSA agreed to eliminate interest on certain loans it purchased that allegedly included excessive interest rates due to the inclusion of GAP coverage. Santander has also agreed to forgive outstanding interest on the loans, and reimburse consumers for the interest they have already paid on the debts.

The consumers helped by the settlement are located across the state, with concentrations in Boston, Worcester, Springfield, Pittsfield, and Lowell. On average, the settlement will provide each consumer with approximately $11,000 in relief.

Under the settlement, Santander will also pay $150,000 to the state and must perform a supervised audit of its existing loan portfolio to make sure that no additional consumers have been overcharged because of GAP fees. The fees added to the consumers’ loans caused the effective interest rates to exceed the relevant 21 percent state interest cap.

“Consumers need to know that when they take out a loan, they will be treated fairly,” Healey said. “It is important that protections under state law are properly applied, especially when it comes to economically disadvantaged consumers in Massachusetts.”