Document

CORRESP 1 filename1.htm Document

VIA EDGAR

April 24, 2018

Ms. Stephanie L. Sullivan

United States Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, D.C. 20549

Re: Santander Consumer USA Holdings Inc.

Form 10-K for the Fiscal Year Ended December 31, 2016

Filed February 28, 2017

Form 10-Q for the Fiscal Quarter Ended June 30, 2017

Filed August 2, 2017

Response Dated October 27, 2017

File No. 001-36270

Dear Ms. Sullivan:

This letter includes the responses of Santander Consumer USA Holdings Inc. (the “Company”, “SC” or “Management”) to the comments of the staff of the Securities and Exchange Commission (the “Commission”), Division of Corporation Finance (the “Staff”), regarding its Form 10-K for the fiscal year ended December 31, 2016 (the “Form 10-K”) and its Form 10-Q for the quarter ended June 30, 2017 (the “Form 10-Q”), which were delivered in a letter dated December 14, 2017 and questions verbally communicated by the Staff in telephonic conversations held between SC Management and the Staff on February 15, 2018 and February 19, 2018. For your convenience, in this letter the text of the Staff’s comments is set forth in bold, italicized text followed by the responses of the Company.

Form 10-K for the Fiscal Year Ended December 31, 2016

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 46

Deferrals and Troubled Debt Restructurings, page 66


1.	We note your response to the first bullet of comment 2. Please incorporate this information into your disclosures going forward, as we believe it would be useful for investors to better understand your deferral process and related implications on your delinquency statistics.

PRIVILEGED AND CONFIDENTIAL

Ms. Stephanie L. Sullivan

April 24, 2018

Page 2 of 22

Response:

We enhanced the disclosures in our Form 10-K for the year ended December 31, 2017, as follows (new language underlined):

“At the time a deferral is granted, all delinquent amounts may be deferred or paid. This may result in the classification of the loan as current and therefore not considered a delinquent account. However, there are instances when a deferral is granted but the loan is not brought completely current such as when the account days past due is greater than the deferment period granted. Such accounts are aged based on the timely payment of future installments in the same manner as any other account. Historically, the majority of deferrals are approved for borrowers who are either 31-60 or 61-90 days delinquent and these borrowers are typically reported as current after deferral. A customer is limited to one deferral each six months, and if a customer receives two or more deferrals over the life of the loan, the loan will advance to a TDR designation.”

Note 1 – Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices, page 89

Retail Installment Contracts, page 90

We note your response to the second bullet of comment 4 containing the enhanced disclosure you intend to make in future filings regarding the estimates and assumptions used in developing your prepayment estimate. We believe ASC 310-20-50-2 requires that the actual quantitative assumptions be disclosed. Please tell us, and revise future filings to disclose, the quantitative assumptions used in developing the prepayment estimate.

Response:

We enhanced the disclosures in our Form 10-K for the year ended December 31, 2017, as follows (new language underlined):

“The amortization of discounts, subvention payments from manufacturers, and other origination costs on retail installment contracts held for investment acquired individually, or through a direct lending program, are recognized as adjustments to the yield of the related contract using the effective interest method. The Company estimates future principal prepayments specific to pools of homogenous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans generally experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not

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April 24, 2018

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considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience, and is used as an input in the calculation of the constant effective yield. Our estimated weighted average prepayment rates ranged from 6.1% to 10.4% as of December 31, 2017, and 6.0% to 10.5% as of December 31, 2016.”

If there were a significant change to our prepayment rate assumption, in accordance with ASC 310-20-50-2, we would disclose the specific element that is driving that change and why that element is impacting the prepayment rate assumption. However, we have not had a significant change in our prepayment rate assumptions in any periods filed in 2017.

Leased Vehicles, net, page 92

We note your response to comment 5 where you discuss how you re-estimate your residual values on a monthly basis, and use the results to adjust depreciation on a lease level basis. We also note per slide 10 of the Form 8-K furnished on October 30, 2017 that the total loss on lease vehicles returned to you and sold at auction increased from $28.3 million during the first nine months of 2016, to $109.8 million during the first nine months of 2017. In light of your process for re-estimating residual values on a monthly basis, please tell us why the level of losses recognized at auction has grown so substantially during 2017. Additionally, please tell us if, and, if so, how, you have incorporated this information into your process for re-estimating residual values.

Response:

First, we respectfully would like to point out that the amounts reported on slide 10 of the Form 8-K furnished on October 30, 2017 are gains and not losses.

Second, the amounts reported in the Form 8-K do not reconcile to our Form 10-Q results as they are not US GAAP financial results and, instead, are focused on comparing the origination residual values with auction sale results. The primary reasons for the differences are: (a) figures in the Form 8-K include gains on the total SC serviced portfolio, as compared to the SC owned portfolio disclosed in the Form 10-Q; (b) in the Form 8-K, gains are calculated as the difference between Automotive Lease Guide “ALG”¹ values at origination and net sales proceeds, as compared to the difference between the lease carrying amount at sale date and net sales proceeds as disclosed in the Form 10-Q; and (c) Form 8-K figures only include gains on leased vehicles sold at auction as compared to gains on all liquidations such as auctions, dealer purchases and customer purchases, which form the basis for disclosure in our Form 10-Q.

¹ALG , Inc. is a third-party company providing Residual Value projections to the automotive industry

Ms. Stephanie L. Sullivan

April 24, 2018

Page 4 of 22

The Company advises the Staff that we will incorporate further clarification for both of the items listed above, in our future 8-K filings filed with the Commission.

Our accounting gain on liquidation of all owned lease vehicle was net $74 million and $39 million, for the nine months ended September 30, 2017 and 2016 respectively. As disclosed on page 65 of our Form 10-Q for the nine months ended September 30, 2017, our average lease portfolio (Lease Vehicle, net) increased by approximately 20% from $8.6 billion as of September 30, 2016 to $10.2 billion as of September 30, 2017. Our average gain on sale remained materially consistent at approximately $750-$850 per vehicle for the nine months ended September 30, 2017 and 2016 respectively.

We monitor our gains and losses on sale of leased vehicles regularly and our policy on depreciation, including frequent estimation of residual values, has resulted in an asset carrying amount at time of disposition that is typically within a reasonable amount of the net sales proceeds.

We note your response to comment 6 regarding the processes you perform in your impairment assessment for your investment in operating leases on a quarterly basis. In light of the fact that you have identified this policy as a critical accounting estimate, please revise future filings to discuss the specific assumptions you made during the performance of your impairment analysis. Specifically, disclose the fact that you believe residual values would have to experience a greater than 20% decline on a quarterly basis before you would conclude that decreases in residual values would represent an impairment indicator. Furthermore, during periods where no impairment triggers were identified, please disclose that fact.

Response:

As stated in our earlier response, we regularly monitor changes in residual value forecasts at a vehicle model level. While, for internal governance purposes the 20% threshold is a strong indicator for impairment, we may conclude that there is an impairment indicator, even if the model level projected average residual values decrease by less than 20%, in light of other factors. Accordingly, we enhanced the disclosures in our Form 10-K for the year ended December 31, 2017, as follows (new language underlined):

“The Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a systemic and material decline in used vehicle values, indicates that an impairment may exist. These circumstances could include, for example, shocks to oil and gas prices (which may have a pronounced impact on certain models of vehicles) or pervasive manufacturer defects (which may systemically affect the value of a particular vehicle brand or model).

Ms. Stephanie L. Sullivan

April 24, 2018

Page 5 of 22

Impairment is determined to exist if fair value of the leased asset is less than carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. No impairment was recognized in 2017, 2016, or 2015.”

Note 18 – Investment Gains/Losses, page 143


5.	We note your response to the second bullet of comment 9 where you state that the key driver to continued write-downs is the lower of cost or market adjustment recorded for each new originated loan, based on forecasted lifetime loss. Please respond to the following:


a.	In light of the fact that you disclosed on page 51 of your Form 10-K that your personal loan origination volume during 2016 was $199.4 million (down from $887.5 million during 2016), please tell us how during 2016 you could record $429.1 million of lower of cost or market adjustments due to customer default activity during on newly originated loans.

Response:

Through February 2016, the Company’s personal loan portfolio primarily comprised term amortizing loans (“LendingClub”) and revolving loans (“Bluestem”). We completed the sale of substantially all of our LendingClub loans in February 2016. We continued to hold our Bluestem portfolio, which had a carrying value of approximately $1.1 billion as of December 31, 2016.

As disclosed in Item 7, we determined origination volumes for the LendingClub portfolio to be new loans only since this portfolio is comprised of term amortizing term loans. The Bluestem portfolio comprises revolving loans; accordingly, we determined origination volumes by calculating the change in the recorded investment in the portfolio month over month. Declines in the recorded investment during any month were not reported as negative volume or netted against increases from other months.

However, we respectfully acknowledge the Staff's comment and determined that, to provide further transparency, we will enhance the disclosures in future filings, beginning with disclosures included in Item 7 under “Volume” in our Form 10-K for the year ended December 31, 2017. In particular, we will: (a) revise our

Ms. Stephanie L. Sullivan

April 24, 2018

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approach to define personal loan origination volumes, (b) disclose gross (versus net) origination volumes and that we determine origination volumes to include new originations, gross of paydowns and charge-offs, related to customers who took additional advances on existing accounts (including capitalized late fees, interest and other charges), and newly opened accounts. We have included gross (versus net) origination volumes and recorded lower of cost or market adjustments (“LOCOM”), so the staff can better understand the company’s accounting for personal loan portfolio (see below) (Dollar amounts in thousands):



		For the Nine months ended September 30, 2017	For the year ended December 31, 2016	For the Nine months ended September 30, 2016

Additional advances on existing accounts	A	822,997	1,251,387	833,841
Newly opened accounts	B	125,547	304,396	154.805
Origination Volumes as newly defined	C = A+B	948,543	1,555,783	988,646

LOCOM adjustment		237980(a)	423616(b)	266,506

(a) Excludes $8.5 million related to LOCOM adjustment for certain retail installment contracts classified as held for sale.

(b) The total LOCOM adjustments for the year ended December 31, 2016 of $423.6 million, included $429 million in customer default activity, and net favorable adjustments of $14.4 million, primarily related to net changes in the unpaid principal balance on the personal lending portfolio.

The LOCOM adjustment recognized during various periods discussed above was applied proportionately over newly opened loans and additional advances on existing loans. In addition, irrespective of the volume of originations, paydowns and charge offs, at a quarter end we determine the LOCOM adjustment required for the unpaid receivable balance of the period end.


b.	Please quantify how much of the $429.1 million lower of cost or market adjustment due to customer default activity recognized during 2016 was for newly originated loans, versus existing loans.

Response:

Refer to response above for revised originations volumes and related LOCOM adjustments.


c.	Similarly, in light of the fact that you disclosed on page 58 of the September 30, 2017 Form 10-Q that your personal loan origination volume during the nine months ended September 30, 2017 and 2016 was $5.7 million and $9.3 million,

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April 24, 2018

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respectively, please tell us how you could record $246.5 million and $266.5 million, respectively, in lower of cost or market adjustments due to customer default activity on newly originated loans.

Response:

Refer to response above for revised originations volumes and related LOCOM adjustments.


d.	Explain to us in detail the factors driving your personal loan origination volume during 2016 to be $199.4 million, but only $9.3 million during the nine months ended September 30, 2016 (as disclosed on page 58 of the September 30, 2017 Form 10-Q).

Response:

Refer to response above for revised originations volumes. In addition, the receivable balance related to personal loan portfolio typically increases significantly in the last three months of the year, due to seasonality (such as Thanksgiving and Christmas related shopping). As a reference, the new originations for personal loan portfolio, was a total of $280 million for the months of October and November 2017.


6.	We note your response to the third bullet of comment 9 containing the proposed disclosure you plan to make regarding the most significant unobservable inputs. Please respond to the following:


a.	In light of the fact that you disclose that you perform both a market and an income approach to determine fair value, please also disclose how you consider both of these methodologies in arriving at the final fair value estimate. For example, disclose how you weight each of the estimates obtained from the two methodologies and whether you follow a consistent approach each period.

Response:

We engage an independent third party each year to perform fair value analysis of our personal lending portfolio, and we take responsibility for that valuation and the requisite inputs. The valuation technique used in this analysis is a combination of the income approach and market approach with equal weighting to both approaches. However, our current fair value LOCOM adjustment that is recognized in our financial statements is based on the lower of a range of estimates that include the third party valuation and the bids received via the market approach. Our view as to the appropriateness of this estimate is further

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April 24, 2018

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informed by the probability to sell at recently received third party offers, which we believe to be the most representative market participant view of fair value. This valuation technique has been followed consistently each period.

We have enhanced disclosures included in our Form 10-K for the year ended December 31, 2017 to incorporate this information. See disclosures included in bullet 3 below.


b.	Clarify for us whether you obtain additional market bids each period for purposes of your market approach.

Response:

We continue to receive interest from market participants, including formal market bids (party “willing to buy at”, rather than non-committal quote), periodically for our personal lending portfolio which is an input to determine fair value LOCOM adjustment.


c.	Tell us why you have not disclosed the principal cash flows and net payment rate as part of your significant unobservable inputs.

Response:

We acknowledge that we have not disclosed certain other significant unobservable inputs. We included the below disclosures in our Form 10-K for the year ended December 31, 2017, as follows:



Financial Assets	Fair Value at December 31, 2017	Valuation Technique	Unobservable Inputs	Range

Personal loans held for sale	$1,062,089	Lower of Market or Income Approach	Market Approach Market Participant View Income Approach Discount Rate Default Rate Net Principal Payment Rate Loss Severity Rate	70% - 80% 15% - 20% 30% - 40% 50% - 70% 90% - 95%

The comparable inputs to the fair value during 2015 and 2016, including the range for discount rates, credit default assumptions and net principal payment rates, were consistent with the disclosure above.

Ms. Stephanie L. Sullivan

April 24, 2018

Page 9 of 22

Form 10-Q for the Fiscal Quarter Ended June 30, 2017

Note 4 - Credit Loss Allowance and Credit Quality, page 19


7.	We note your response to comment 10 regarding the change to the required minimum payment for receivables acquired from unaffiliated third party originators or originated by the Company. Please respond to the following:


a.	Please revise and enhance your disclosures going forward to incorporate your statement that the payment following a partial one must be a full payment, or the account will become delinquent at that time.

Response:

We enhanced the disclosures in our Form 10-K for the year ended December 31, 2017, as follows (new language underlined):

“The Company noted some deterioration in the performance of recent originations, particularly those loans originated in 2015, and addressed those trends with the introduction of more disciplined underwriting standards in late 2016. Based on this disciplined underwriting (among other things), the servicing practices for retail installment contracts originated after January 1, 2017 changed, such that there is an increase in the minimum payment requirements. Although these changes impact the measurement of customer delinquencies, the Company does not believe they have a significant impact on the amount or timing of the recognition of credit losses and allowance for loan losses. With respect to receivables originated by the Company through its “Chrysler Capital” channel, the required minimum payment is 90% of the scheduled payment. With respect to receivables originated by the Company or acquired by the Company from an unaffiliated third-party originator on or after January 1, 2017, the required minimum payment is 90% of the scheduled payment, whereas previous to January 1, 2017 the required minimum payment was 50% of the scheduled payment. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time.”


b.	Please revise and enhance your disclosures in the December 31, 2017 Form 10-K to clarify that this change was driven by a change in servicing practices for loans originated after January 1, 2017.

Response:

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April 24, 2018

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Refer above. In addition, we repeated the disclosures included in our Form 10-Q for the six months ended June 30, 2017 and nine months ended September 30, 2017, in our Form 10-K for the year ended December 31, 2017.


c.	Please revise your disclosures in the December 31, 2017 Form 10-K to disclose that you reviewed the impact of this change on the amount and timing of loss recognition and concluded that the impact was not significant to the allowance for loan losses.

Response:

Refer above to the response in first bullet.


d.	Please identify and explain all of the impacts to the borrower due to the change in required minimum payment (legal implications, additional late fees, etc.). In addition, please explain the possible actions that could be taken by a servicing specialist upon communication with the borrower. Can a specialist waive or adjust the 90% requirement? Or waive any additional fees?²

If the borrower does not make the required minimum payment the impacts are 1) the loan rolls into delinquent status, 2) the borrower is subject to late fees on the account and 3) if the borrower continues to be delinquent in payment, the delinquency status is reported to the credit bureaus. The borrower may request a late fee waiver and servicing personnel are able to consider and process such a waiver request.

The borrower is not aware of the minimum payment requirements unless the borrower contacts the Company for any concessions. The minimum payment amount required for each loan is calculated and input into the servicing system on the day of origination and the servicing personnel cannot modify the minimum payment requirement throughout the life of the loan.

²Question verbally communicated by the Staff in telephonic conversations held between SC Management and the Staff on February 15 and 19, 2018

Ms. Stephanie L. Sullivan

April 24, 2018

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e.	Please explain the difference in underwriting or other origination practices in 2015 that contributed to the lower credit quality that you noted.²

In early 2015, SC’s business strategy and underwriting practices resulted in an increase in Non-Prime Retail Installment Contracts (RICs) originations and, as a result, higher originations of thin files. The number of thin files as a percentage of retained RIC originations increased from approximately 20% during 2014 to approximately 30% by the end of 2015. During 2016, we began to note some deterioration in the performance of recent originations, particularly those loans originated in 2015, and addressed those trends with the introduction of more disciplined underwriting standards in late 2016. As a result of that tightening, there was a significant decrease in our retained RIC originations from $16.7 billion in 2015 to $12.7 billion in 2016, and, accordingly, the percentage of thin files was reduced to approximately 25% by end of 2016.


f.	Please clarify why the servicing change was made as of January 1, 2017, prospectively only?²

Concurrent with the tightening of underwriting standards driving a shift to higher credit quality retained RIC originations, we determined it was also appropriate to increase the required minimum payment to 90% of the scheduled payment for new Core (i.e. non-Chrysler)³ loans in recognition of the change in loan characteristics.

We made the change prospectively for loans originated after January 1, 2017 since 1) existing customers were already use to or aware of the previous payment threshold relative to partial payments and 2) a change in that expectation could be viewed as adversely affecting that existing customer.


g.	Please explain what (if any) barriers there are to making these types of servicing changes, internal/external/legal implications? For example, could you simply choose to make the minimum payment 70% instead?²

There are no barriers or restrictions to making these servicing changes. However, we do not intend to change these going forward absent other pertinent facts and circumstances. For example, if competitive factors demanded it or some other servicing practice necessitated it. Further, while there is diversity in practice, our change to 90% is more commonly applied throughout the industry and is consistent with banking regulatory guidance.

³With respect to receivables originated by the Company prior to January 1, 2017 and through its “Chrysler Capital” channel, the required minimum payment is 90% of the scheduled payment.

Ms. Stephanie L. Sullivan

April 24, 2018

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8.	We note your response to comment 11 related to the disclosure change of your delinquency buckets. In light of the fact that your delinquency bucket disclosures will not clearly align with the calculation of your delinquency ratios, please consider quantifying the amount of loans that are more than 60 days past due in the section where you disclose the delinquency ratios.

Response:

The delinquency ratios are disclosed in our Selected Financial Data disclosures (Item 2 of our Form10-Q filing), where we continue to disclose the amount of loans that are more than 60 days past due and calculate “delinquency ratio” based on 60 days past due. We continued this disclosure into Q3’2017 and will continue to update this disclosure in subsequent filings. We disclosed the following amounts in our Form 10-Q for the quarter ended June 30, 2017:



	Three Months Ended		Six Months Ended
	June 30, 2017	June 30, 2016	June 30, 2017	June 30, 2016
	(Dollar amounts in thousands)
End of period delinquent principal over 60 days, loans held for investment	1,292,326	1,151,627	1,292,326	1,151,627


9.	We note your response to comment 12 related to your change in policy for returning loans back to accrual status. Please respond to the following:


a.	Tell us why your disclosure did not highlight this as a change from the policies previously disclosed in your December 31, 2016 Form 10-K, or clarify that it was just for new troubled debt restructurings (TDRs) after January 1, 2017.

Response:

The question above refers to a change in policy, but we respectfully would like to refer you to the last paragraph of our response to question 12 in our previous letter to you dated October 27, 2017, where we concluded that this clarification of our policy, is a “change in estimate” in accordance with ASC 250, and should be applied prospectively for TDR’s that are not reasonably assured of collection or which have returned to accrual. Accordingly, this was not highlighted in the “Accounting Policies” section in our Form 10-Q for the quarter ended March 31, 2017 or later.

Ms. Stephanie L. Sullivan

April 24, 2018

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In addition, the Company enhanced its disclosure in our Form 10-Q for the quarter ended June 30, 2017 (“Q2’2017”), related to these TDR loans which were placed on non-accrual. We disclosed the following in our Footnote 4 of Q2’ 2017, and we will continue to update this disclosure in subsequent filings:

“As of June 30, 2017, the Company had $210,191 of TDR loans which were less than 60 days past due, but for which repayment was not reasonably assured, and were therefore in nonaccrual status.”

We included the following disclosures in our Form 10K for the year ended December 31, 2017 (new language underlined):


a)	Placing loans on nonaccrual status and Treatment of receipts for nonaccrual loans:

“Interest is accrued when earned in accordance with the terms of the retail installment contract. The accrual of interest is discontinued and reversed once a retail installment contract becomes more than 60 days past due, and is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. For loans on nonaccrual status, interest income is recognized on a cash basis, however the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of those loans should also be placed on a cost recovery basis. For TDR loans on nonaccrual status, the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on cost recovery basis, the Company returns to accrual when a sustained period of repayment performance has been achieved (typically defined as six months), which were insignificant as of December 31, 2017.”


b)	Reason for placing certain TDR loans on nonaccrual status and cost recovery basis:

“Beginning January 1, 2017, based on observed TDR performance, the Company places certain additional TDRs on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured and at the latest, when the account becomes past due more than 60 days . The Company believes repayment under the revised terms is not

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April 24, 2018

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reasonably assured for a retail installment contract that is already on nonaccrual (i.e., more than 60 days past due) and has received a modification or deferment that qualifies for a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on nonaccrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis.”

“While the Company's nonaccrual designation remains consistent at more than 60 days past due, SC continuously assesses TDR collection performance. The recognition of interest income on impaired loans (such as TDR loans) is based on an expectation of whether the contractually due interest income is reasonably assured of collection. Prior to January 1, 2017, the collection performance of TDR loans supported classifying TDRs as nonaccrual only when past due more than 60 days, regardless of delinquency status at the time of the TDR event. However, the Company noted emerging trends related to recent TDR vintage performance that caused the Company to review whether collection of interest income was reasonably assured for certain TDRs. Accordingly, beginning January 1, 2017, based on observed TDR performance, the Company places certain additional TDRs on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured and at the latest, when the account becomes past due more than 60 days. The Company believes repayment under the revised terms is not reasonably assured for a retail installment contract that is already on nonaccrual (i.e., more than 60 days past due) and has received a modification or deferment that qualifies for a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on nonaccrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis. If the portfolio of TDRs with these characteristics continues to grow, this change would affect the magnitude of interest income to be recognized in the future.”

“TDR loans are generally measured based on the present value of expected cash flows. The recognition of interest income on TDR loans reflects management’s best estimate of the amount that is reasonably assured of collection and is consistent with the estimate of future cash flows used in the impairment measurement. Any accrued but unpaid interest is fully reserved for through the recognition of additional impairment on the recorded investment,

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April 24, 2018

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if not expected to be collected. As of December 31, 2017, the Company had $1,390,373 of TDRs on nonaccrual status. These loans included $790,461 of TDRs for which repayment was not reasonably assured. Accordingly, these loans were placed on nonaccrual status and followed cost recovery basis. The Company applied $56,740 of interest received, on these loans, towards principal (as compared to interest income), in accordance with cost recovery method.”


c)	Details of all retail installment contracts acquired individually held for investment that were placed on nonaccrual status:

“Within the total delinquent principal above, retail installment contracts acquired individually held for investment that were placed on nonaccrual status, as of December 31, 2017 and 2016 :



	December 31, 2017		December 31, 2016
	Dollars (in thousands)	Percent (a)	Dollars (in thousands)	Percent (a)

Non-TDR	$666,926	2.6%	$721,150	2.6%
TDR (b)	$1,390,373	5.4%	$665,068	2.4%

Total nonaccrual principal	$2,057,299	7.9%	$1,386,218	5.1%

(a) Percent of unpaid principal balance of total retail installment contracts acquired individually held for investment.

(b) Refer to "Troubled Debt Restructurings" section below for discussion around significant increase in nonaccrual loans.

“As of December 31, 2017, the Company had $1,390,373 of TDRs on nonaccrual status, of which $790,461 of TDRs followed cost recovery basis. The remaining nonaccrual TDR loans follow cash basis of accounting. Out of the total TDRs on cost recovery basis, $652,679 of TDRs were less than 60 days past due. As of December 31, 2016, the Company had $665,068 of TDRs on nonaccrual status, none of which followed cost recovery basis.”

Ms. Stephanie L. Sullivan

April 24, 2018

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b.	Given that the trend of the deterioration in the performance of your TDR portfolio was noted as early as 2016, tell us why you have elected to only apply this policy to new TDRs after January 1, 2017, and not all existing TDRs.

Response:

All loans, including TDRs, historically, and currently, are placed on nonaccrual when they are greater than 60 days past due. To evaluate the recognition of interest income on impaired loans, we perform periodic analyses related to collectability and concluded that beginning in 2017, the probability of interest income being reasonably assured had changed with respect to the performance of certain types of modifications and specifically those related to more recent origination vintages. Since we are no longer certain that the repayment performance supports that the “reasonable assurance” criteria can be met for current modifications, we changed our estimate of interest income recognition for those loans. Our assessment of previous modifications did not change and, therefore, we did not apply the change to those loans. However, if those legacy loans meet certain criteria (i.e. repayment is not reasonably assured) in the future, that would not prevent us from placing them on nonaccrual status and cost recovery basis.

Our accounting policy for classifying loans as accrual, is based on our assessment of collectability of repayment of the principal and interest balances associated with the TDR portfolio. We grant deferrals and re-age the account when our servicing analysis indicates that the action is expected to be accretive in the long term. This analysis considers the borrower’s credit profile, payment history, and capacity to perform, as well as the current and future expected value of the collateral. Prior to 1/1/17, we determined accrual status for all TDRs post event based on the resulting delinquency status: less than 60 DPD on accrual, greater than 60 DPD on non-accrual.

Our assessment of collectability on those TDR loans was supported by periodic reviews of the performance of TDR loans post the event. Based on these assessment results (using 2014, 2015 and early 2016 TDR vintages), we concluded that our accounting practice was appropriate, as the repayment performance of the TDR loan portfolio consistently met a 70-80% threshold, which we consider to be an appropriate indicator of collectability.

During 2016, we noted that while the repayment of the principal and interest related to TDR’s continued to meet our reasonably assured criteria, there was a significant deterioration in the performance of our 2015 vintages, as shown in the table below:

Ms. Stephanie L. Sullivan

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The net loss rate from 2015 vintages was significantly higher than the loss rate for 2014 vintages and, in addition, in the beginning of 2017, we observed that the 2015 origination vintage had become the largest individual origination vintage year in the TDR portfolio. For example, 2015 origination vintages were approximately 35%, 29% and 22% of the total TDR portfolio as of March 31, 2017, December 31, 2016 and September 30, 2016 respectively. Given the credit performance we had observed to date on 2015 originations, we viewed the increase in 2015 mix in the TDR portfolio as a trigger to perform additional analysis to determine if some portion of the new TDRs (starting in 1/1/2017) may not meet the reasonably assured collection threshold.

Accordingly, we reviewed the performance of TDR vintages segmented by delinquency status (at the time of TDR event) and modification/deferment categories. We noted that the charge off rate for those TDR vintage loans that were (a) current; (b) 0-30 days delinquent; and (c) 31-60 days delinquent, at the time of the TDR event, evidenced a greater than 70-80% collectability rate. However, we also noted that the TDR loans that were 60 days past due at the time of TDR event or subsequently had a third instance of deferral, did not meet this collectability threshold.

Based on this analysis we concluded:


(a)	Consistent with prior periods, all TDR loans that are less than 60 days past due at the time of the TDR event should remain on accrual status, since the collectability is reasonably assured;


(b)	Effective 1/1/2017, based on observed TDR performance, loans 60 days past due at the time of the event are placed on nonaccrual status. Also, for TDR loans that remain on accrual status post TDR, a third instance of deferral/

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extension will be considered a triggering event to move to a non-accrual status given historically high default rates.


(c)	In addition, we placed both of these categories of loans on a cost recovery basis.


c.	Tell us whether you considered making changes to your TDR programs in light of the increasing deterioration noted in the effectiveness of the modifications.

Response:

We did not change the TDR programs in light of deteriorating performance across certain types of loans. Aside from the requisite accounting measurement, the modification program has an economic benefit to both the borrower and the Company. We addressed the deterioration in the performance of certain vintages by changing underwriting standards in late 2016, which resulted in SC originating loans that were not as deep on the subprime credit spectrum or otherwise had stronger loan terms such as a lower loan to value ratio.


d.	Revise your disclosures in the December 31, 2017 Form 10-K to clearly state your new policy and the periods for which it is effective.

Response:

Refer above to the response in first bullet.


e.	Please include here your non-accrual and related revenue recognition accounting policies as stated in 2017, as compared to the accounting policies in place in 2016. What, if anything, changed?²

Our policy as disclosed in our Form 10K for the year ended December 31, 2016:

Our policy as disclosed in our Form 10K for the year ended December 31, 2017 (new language underlined):

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and reinstated if a delinquent account subsequently becomes 60 days or less past due. For loans on nonaccrual status, interest income is recognized on a cash basis, however the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of those loans should also be placed on a cost recovery basis. For TDR loans on nonaccrual status, the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on cost recovery basis, the Company returns to accrual when a sustained period of repayment performance has been achieved (typically defined as six months), which were insignificant as of December 31, 2017.

The Company believes repayment under the revised terms is not reasonably assured for a retail installment contract that is already on nonaccrual (i.e., more than 60 days past due) and has received a modification or deferment that qualifies for a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on nonaccrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis.”

“If the portfolio of TDRs with these characteristics continues to grow, this change would affect the magnitude of interest income to be recognized in the future.”

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 51

Provision for Credit Losses, page 66


10.	We note your response to comment 13 regarding the change in model used for estimating the allowance for loan losses from the vintage loss model to a transition based Markov model. Please respond to the following:

You state in response to the second bullet that you noted that the losses forecasted by the Markov model for both non-TDR and TDR portfolios were much more precise, as compared to the legacy models. However, you also state in responses to the third and fourth bullets that you evaluated the impact of the change of the new model for both the first and second quarters of 2017 and the impact was immaterial. Please provide further detail as to how you concluded the losses forecasted by the new model were much more precise than the old model.

Response

Through periodic back-testing, comparing forecasted gross losses with actual gross losses across various snapshot dates, we noted that the forecasted gross

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losses by the Markov model showed more accurate results than the legacy model, and further that the legacy model back-testing inaccuracy was widening over time. These results necessitated incremental management adjustments to the legacy model results to arrive at an appropriate final allowance in periods prior to Q2’2017.

These management adjustments were no longer required with the implementation of the Markov model, accordingly they were removed, and the impact of the move to the Markov model results was immaterial.

You state in response to the third bullet that the net difference in the allowance for credit losses and impairment for your TDR and non-TDR retail installment contracts was immaterial, amounting to only 1.6%. However, please tell us whether you saw more significant changes in each component of the allowance. As part of your response, to the extent the changes in the individual components of the allowance changed significantly, please tell us the factors that you believe drove those differences.

Response

We did not see any significant change in either the non-TDR or TDR allowance with the implementation of the Markov model. The net difference in impairment and allowance for credit losses, for our TDR and non-TDR individually acquired retail installment contacts, as of March 31, 2017 and June 30, 2017, due to change in model methodology (Vintage loss model to Markov transition matrices) was immaterial. TDR impairment results were 0.5% higher using the Markov model and Non-TDR allowance results were 2.7% higher, amounting to an overall immaterial increase of 1.6%.


c.	You state in response to the third bullet, you were able to refine your qualitative factors to align with the specificity provided by the Markov calculation, and that impact was not significant to the overall allowance for credit losses. Please explain in more detail how the factors were adjusted and directionally how the qualitative factor changed.

Response

One of the elements included in our qualitative factors relates to management adjustments for model imprecision. As noted earlier, forecasted numbers from the Markov model were more accurate than the legacy model, therefore with the implementation of the Markov model, we were able to refine our qualitative factors by reducing the management adjustments made due to back-testing results (i.e., model imprecision) specific to the legacy model.

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The legacy model tended to forecast losses for Non-TDR loans approximately 9% higher than actual back-tested experience and TDR loans approximately 5% lower. In Q1’17, net management adjustments due to the legacy model back-testing results amounted to approximately 7% of the final legacy total allowance; these adjustments were removed with the implementation of the Markov model in Q2’17.

Deferrals and Troubled Debt Restructurings, page 123

11.

We note your response to comment 14 regarding modifications that are not considered to be troubled debt restructurings. Please clarify why you believe this change was driven by consumer practices when the change appears to be driven by a change in your own practices. As part of your response, please tell us whether you were directed to make this change by one of your regulators. Additionally, please enhance your disclosures to better explain this process, including the fact that the any change in APR is made within 7 days of the date the contract is signed.

Response:

We stated in our response that there was no specific change in consumer practices during Q3’16 that drove these deal structure changes. Rather the change was made primarily to give the consumer the benefit of a lower rate due to an improved contracted deal structure compared to the deal structure that was approved during the underwriting process.

We confirm that this change was not driven by any regulatory finding or guidance. The decision to provide the customer with the betterment was based on internal reviews. We noted that a fair percentage of the final structure of the deals submitted to us were slightly different that the originally quoted rate. If the deal structure differed from the originally quoted rate and it was a betterment to the customer, we adjusted the rate accordingly.

We enhanced the disclosures in our Form 10-K for the year ended December 31, 2017, as follows:

“Max buy rate modifications comprises of loans modified by the Company to adjust the interest rate quoted in a dealer-arranged financing. Beginning in the third quarter of 2016, the Company reassesses the contracted APR when changes in the deal structure are made (e.g. higher down payment and lower vehicle price). If any of the changes result in a lower APR, the contracted rate is reduced. Substantially all deal structure changes occur within seven days of the date the

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contract is signed. These deal structure changes are made primarily to give the consumer the benefit of a lower rate due to an improved contracted deal structure compared to the deal structure that was approved during the underwriting process. Fair Lending modifications comprises of loans modified by the Company related to possible "disparate impact" credit discrimination in indirect vehicle finance. These modifications are not considered a TDR event because they do not relate to a concession provided to a customer experiencing financial difficulty.”

* * *

We remind you that the Company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.

The Company hopes that the foregoing has been responsive to the Staff’s comments. If you have any questions related to this letter, please contact the undersigned at (214) 540-2072 or by email at gmartindell@santanderconsumerusa.com.

Sincerely,

/s/ Grace Martindell

Name: Grace Martindell

Chief Accounting Officer

Santander Consumer USA Holdings Inc.

cc: Juan Carlos Alvarez de Soto

Chief Financial Officer

Santander Consumer USA Holdings Inc.

Scott Powell

Chief Executive Officer

Santander Consumer USA Holdings Inc.