Few things capture this phenomenon like the partnership between Fiat Chrysler Automobiles and Banco Santander. Since 2013, as U.S. car sales soared, the two have built one of the industry's most powerful subprime machines.
Details of that relationship, pieced together from court documents, regulatory filings and interviews with industry insiders, lay bare some of the excesses of today's subprime auto boom. Wall Street has rewarded lax lending standards that let people get loans without anyone verifying incomes or job histories.
For instance, Santander recently vetted incomes on fewer than one out of every 10 loans packaged into $1 billion of bonds, according to Moody's Investors Service. The largest portion were for Chrysler vehicles.
Some of their dealers, meantime, gamed the loan application process so low-income borrowers could drive off in new cars, state prosecutors said in court documents.
Through it all, Wall Street's appetite for high-yield investments has kept the loans -- and the bonds -- coming. Santander says it has cut ties with hundreds of dealerships that were pushing unsound loans, some of which defaulted as soon as the first payment. At the same time, Santander plans to increase control over its U.S. subprime auto unit, Santander Consumer USA Holdings Inc., people familiar with the matter said.
Santander, subpoenaed or questioned by a group of about 30 states regarding its auto loan underwriting and securitization activities, declined to comment on "active legal matters." In May, Santander agreed to pay $26 million to settle allegations brought by Delaware and Massachusetts as part of ongoing investigations into the auto industry's lending practices. Santander, whose partnership with Chrysler goes by the Chrysler Capital brand name, neither admitted nor denied wrongdoing.
Reid Bigland, Chrysler's U.S. sales chief, said Santander has been a "good partner."
In recent years, lending practices in the subprime auto industry have come under increased scrutiny. Regulators and consumer advocates say it takes advantage of people with nowhere else to turn.
For investors, the allure of subprime car loans is clear: securities composed of such debt can offer yields as high as 5 percent. It might not seem like much, but in a world of ultra-low rates, that's still more than triple the comparable yield for Treasuries. Of course, the market is still much smaller than the subprime-mortgage market which triggered the credit crisis, making a repeat unlikely. But the question now is whether that premium, which has dwindled as demand soared, is worth it.
"Investors seem to be ignoring the underlying risks," said Peter Kaplan, a fund manager at Merganser Capital Management.
Asset-backed securities based on auto loans are engineered to keep paying even when some loans sour. Still, some cracks have emerged in the $1.2 trillion market for auto financing. Delinquencies have picked up, as have losses on subprime loans. Auto loan fraud, meantime, is approaching levels seen in mortgages during the bubble.
Auto finance "is not going to bring down the financial system like the mortgage crisis almost did, but it does signal more stress with the consumer," said Stephen Caprio, a credit strategist at UBS Group.
Whatever the case, the Santander-Chrysler relationship has opened a rare window into an industrywide race to the bottom that may have lasting consequences.
In the years after its 2009 bankruptcy, Chrysler looked for a dedicated lender to help customers finance their cars quickly. One reason it picked Santander was the Spanish lender's expertise in "automated decisioning." At the time, a Chrysler executive said the process helped Santander "take a little bit more risk and approve more deals because they mine the data" in subprime.