SC Santander Consumer USA Holdings Inc. - 10-K

ITEM 1A.    RISK FACTORS

T he Company is subject to a number of risks, events and uncertainties that could materially and adversely affect our business, financial condition and results of operations in addition to other possible adverse consequences. We operate in a continually changing business and regulatory environment and, therefore, new risks emerge from time to time. The following are the risks of which we are currently aware that could be material to our business; however, these are not all of the risks that we face, and our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. This section should be read in conjunction with the accompanying financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in the Annual Report on Form 10-K.

Risk Factors Summary

Business and Industry Risks

• COVID-19 has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business.

• Our relationship with FCA is a significant source of our loan and lease originations. Loss of our relationship with FCA, including as a result of termination of our agreement with FCA, could materially and adversely affect our business. Our agreement with FCA may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement. In addition, FCA has the option to acquire an equity participation in the CCAP portion of our business.

• Our failure to effectively monitor or manage those third parties or the failure by those third parties to provide these services or meet contractual requirements could materially and adversely affect our business.

• Loss of our key management or other personnel, or an inability to attract such management and other personnel, could materially and adversely affect our business, financial condition and results of operations.

• Our risk management processes and procedures may not be effective in mitigating our risks.

• We face significant risks in implementing our growth strategy, some of which are outside our control.

• Changes in our relationship with Santander may adversely affect our business.

• Our business could be materially and adversely affected if used-vehicle values decline, resulting in lower residual values of our vehicle leases and lower recoveries in sales of repossessed vehicles.

• Our business could be materially and adversely affected if we fail to manage and complete divestitures.

• Our business could be materially and adversely affected if we are unsuccessful in developing and maintaining relationships with vehicle dealerships.

• Our business could be materially and adversely affected if we are unsuccessful in developing and maintaining our “serviced for others” portfolio.

• We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could materially and adversely affect our business.

• Negative changes in the business of the OEMs with which we have strategic relationships, including FCA, could materially and adversely affect our business.

• Future significant loan, lease or personal loan repurchase requirements could materially and adversely affect our business.

• Competition with other lenders could materially and adversely affect our business.

• Goodwill and intangible asset impairments may be required in relation to acquired businesses.

• Developments stemming from the United Kingdom’s withdrawal from membership in the European Union could have a material adverse effect on us.

Legal, Regulatory and Compliance Risks

• We are a consumer finance company with operations in all 50 states and the District of Columbia. Our industry is highly regulated, and continually changing federal, state and local laws and regulations could materially and adversely affect our business.

• We are subject to certain banking regulations that limit our business activities and may restrict our ability to take other capital actions and enter into certain business transactions.

• We are subject to enhanced prudential standards as a subsidiary of SHUSA, which could materially and adversely affect our business.

• Our business may be materially and adversely affected upon our implementation of the capital requirements under the U.S. Basel III final rules.

• The Dodd-Frank Act, and its associated rules and guidance, and CFPB supervisory audits will likely continue to increase our regulatory compliance burden and associated costs.

• Unlike competitors that are banks, we are subject to the licensing and operational requirements of states and other jurisdiction, and our business would be adversely affected if we lost our licenses.

• We are subject to potential intervention by any of our regulators or supervisors.

• Adverse outcomes to current and future litigation against us may materially and adversely affect our business.

• Negative publicity associated with litigation, governmental investigations, regulatory actions and other public statements could damage our reputation.

• Changes in taxes and other assessments may adversely affect us.

Liquidity and Funding Risks

• Our business could be materially and adversely affected if our access to funding is reduced.

• Poor portfolio performance may trigger credit enhancement provisions in our revolving credit facilities or secured structured financings.

• We apply financial leverage to our operations, which may materially adversely affect our business, financial condition and results of operations.

• Our indebtedness and other obligations are significant, impose restrictions on our business and could materially and adversely affect our business and ability to react to changes in the economy or our industry.

Credit Risks

• Our business, financial condition, liquidity and results of operations depend on the credit performance of our loans.

• Our allowance for credit losses and impairments may prove to be insufficient.

Market Risks

• Adverse macroeconomic conditions in the United States and worldwide may materially and adversely affect our business.

• Changes in interest rates may adversely impact our profitability and risk profile. Uncertainty regarding LIBOR may adversely affect our business.

• We are subject to market, operational and other related risks associated with our derivative transactions that could materially and adversely affect our business.

Technology Risks

• A successful security breach or a cyber-attack could materially and adversely affect our business.

• An outage or a high-severity disruption of our information technology platforms could materially and adversely affect our business operations.

• Our technology platforms may not be adequate for our business or provide a competitive advantage.

Financial Reporting and Controls Risks

• We are required to make significant estimates and assumptions in the preparation of our financial statements, and our estimates and assumptions may not be accurate.

• Lapses in internal controls, including internal control over financial reporting, could materially and adversely affect our business. Internal control over financial reporting may not prevent or detect all errors or acts of fraud.

• Failure to timely satisfy obligations associated with being a public company may have adverse consequences.

Risks and Other Considerations Related to Our Common Stock

• So long as SHUSA controls us, our other stockholders will have limited ability to influence matters requiring stockholder approval, and Santander’s interest may conflict with the interests of our other stockholders.

• Certain provisions of our amended and restated certificate of incorporation, and amended and restated bylaws, have anti-takeover effects, which could limit the price investors might be willing to pay in the future for our common stock.

• We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements. Our stockholders do not have the same protections afforded to stockholders of companies that are subject to such requirements.

For a more complete discussion of the material risks facing our business, see the Risk Factors below.

Business and Industry Risks

The current outbreak of COVID-19 has materially impacted our business, and the continuance of this pandemic or any future outbreak of this or any other highly contagious disease or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.

The outbreak of COVID-19 has been declared a public health emergency of international concern by the World Health Organization, and the president of the United States has made a declaration that the COVID-19 outbreak in the United States constitutes a national emergency.

The COVID-19 outbreak and governmental responses to the outbreak have had, and may continue to have, an adverse impact on economic conditions in the United States. These economic conditions have included, and may include in the future:

• the implementation of emergency declarations of varying severity to provide for social distancing guidelines, stay-at-home orders and mandate the closure of certain non-essential businesses;

• adverse impacts to many industries, leading to the closure of businesses, loss of revenues and increased unemployment; and

• significant disruption and volatility in global credit and financial markets.

During the pandemic, government or regulatory authorities enacted laws, regulations, executive orders or other guidance that allowed obligors to forgo making scheduled payments for some period of time, required modifications to the receivables (e.g., waiving accrued interest), precluded creditors from exercising certain rights or taking certain actions with respect to collateral, including repossession or liquidation of the financed vehicles. If adverse economic conditions caused by the pandemic continue or worsen, government or regulatory authorities may extend these requirements or impose new ones, which may have a material adverse effect on our business, financial condition and result of operations.

In March 2020, we announced that we were providing additional support to customers, employees, and communities during the COVID-19 pandemic and revised our servicing practices to increase the maximum number of permitted monthly payment extensions, grant waivers for late charges and provide lease extensions. Unlike the regional impact of natural disasters, such as hurricanes, the COVID-19 outbreak had impacted obligors nationwide and had a materially more significant impact on the performance of our auto loan and auto lease portfolio than even the most severe historical natural disaster. We experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted. The pandemic has negatively impacted our financial performance and other results of operations during the first half of 2020, and a number of customers experienced hardship related directly or indirectly to the outbreak of COVID-19.

We rely upon our ability to sell securities in the asset backed securities market and upon our ability to access various credit facilities to fund our operations. During the early stages of the pandemic, global credit and financial markets experienced significant disruption and volatility. While global credit and financial markets have recovered, if adverse economic conditions

caused by the pandemic continue or worsen, further disruption or volatility to credit and financial markets may resume, which may have a material adverse effect on liquidity and our ability to fund our operations.

The extent to which the COVID-19 pandemic and associated economic conditions negatively affects our business, financial condition, liquidity and results of operations will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. A sustained economic slowdown as a result of the pandemic may result in declines in new and used vehicle sales and downward pressure on used vehicle values, which would materially and adversely affect our origination of auto loans and leases and the performance of our existing loans and leases. To the extent the COVID-19 pandemic adversely affects business, financial condition, liquidity and results of operations, it may also have the effect of heightening many of the other risks described in these Risk Factors.

Our relationship with FCA is a significant source of our loan and lease originations. Loss of our relationship with FCA, including as a result of termination of our agreement with FCA, could materially and adversely affect our business, financial condition and results of operations. Our agreement with FCA may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement. In addition, FCA has the option to acquire an equity participation in the CCAP portion of our business.

In February 2013, we entered into the MPLFA with FCA under which we launched the CCAP brand. Through the CCAP brand, we originate private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services that we provide under the MPLFA include credit lines to finance FCA franchised dealers, acquisitions of vehicles and other products that FCA sells or distributes, automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, financing for commercial and fleet customers and ancillary services. In addition, we may facilitate, for an affiliate, offerings to dealers for dealer loan financing, construction loans, real estate loans, working capital loans and revolving lines of credit. On June 28, 2019, the Company entered into an Amendment to the MPLFA with FCA, which modified the MPLFA to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. The Amendment also terminated the previously disclosed tolling agreement, dated July 11, 2018, between the Company and FCA.

In accordance with the terms of the MPLFA, in May 2013 we paid FCA a $150 million upfront, nonrefundable payment, which is being amortized over ten years. In addition, in June 2019, in connection with the execution of the sixth amendment to the MPLFA, the Company paid $60 million upfront fee to FCA. This fee is being amortized into finance and other interest income over the remaining term of the MPLFA. The unamortized portion would be recognized as expense immediately if the MPLFA is terminated in accordance with its terms.

As part of the MPLFA, we received limited exclusivity rights to participate in specified minimum percentages of certain of FCA’s financing incentive programs, which include loan rate subvention and automotive lease subvention. We have committed to certain revenue sharing arrangements. We bear the risk of loss on loans originated pursuant to the MPLFA, while FCA shares in any residual gains and losses in respect of automotive leases, subject to specific provisions in the MPLFA, including limitations on our participation in gains and losses.

The MPLFA is subject to early termination in certain circumstances, including our failure to meet certain key performance metrics, provided FCA treats us in a manner consistent with comparable OEMs. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or our other stockholders owns 20% or more of our common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC controls or becomes controlled by an OEM that competes with FCA or (iii) certain of our credit facilities become impaired.

In addition, under the MPLFA, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the MPLFA. There is no maximum limit on the size of FCA’s potential equity participation. Although the MPLFA contains provisions that are designed to address a situation in which the parties disagree on the fair market value of the equity participation interest, there is a risk that we ultimately receive less than what we believe to be the fair market value for such interest, and the loss of our associated revenue and profits may not be offset fully by the immediate proceeds for such interest. There can be no assurance that we would be able to redeploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing our profitability.

Our ability to realize the full strategic and financial benefits of our relationship with FCA depends in part on the successful development of our CCAP business, which requires a significant amount of management’s time and effort, and as well as the success of FCA’s business. If FCA exercises its purchase option, or if the MPLFA were to terminate, or we are otherwise

unable to realize the expected benefits of our relationship with FCA, including as a result of FCA’s bankruptcy or loss of business, there could be a materially adverse impact to our business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of our portfolio, liquidity, reputation, funding costs and growth, and our ability to obtain or find other original equipment manufacturer relationships or to otherwise implement our business strategy could be materially adversely affected.

We rely on third parties to deliver services for many aspects of our business operations. Our failure to effectively monitor or manage those third parties or the failure by those third parties to provide these services or meet contractual requirements could materially and adversely affect our business, financial condition and results of operations.

We depend on third-party service providers for many aspects of our business operations. For example, we depend on third parties like Experian to obtain data related to our market that we use in our origination and servicing platforms. In addition, we rely on third-party servicing centers for a portion of our servicing activities and on third-party repossession agents. If we fail to effectively monitor or manage a service provider or if a service provider fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels or compliance with applicable laws, a failure could negatively impact our business by adversely affecting our ability to process customers’ transactions in a timely and accurate manner, otherwise hampering our ability to service our customers, or subjecting us to litigation or regulatory risk for poor vendor oversight. Such a failure could adversely affect the perception of the reliability of our networks and services, and the quality of our brands, and could materially and adversely affect our business, financial condition and results of operations.

Loss of our key management or other personnel, or an inability to attract such management and other personnel, could materially and adversely affect our business, financial condition and results of operations.

The successful implementation of our strategy depends in part on our ability to retain our experienced management team and key employees, attract appropriately qualified personnel and have an effective succession planning framework in place. Management turnover, including the loss of any key member of our management team or other key employees, could hinder or delay our ability to implement our growth strategy effectively or our ability to manage our business holistically through leadership support of change activities, ongoing and consistent communication of our growth strategy and proper employee training and awareness. Further, if we are unable to attract appropriately qualified personnel as we expand, we may not be successful in implementing our growth strategy. In either instance, our business, financial condition and results of operations could be adversely affected. The extent of our management team changes could result in disruption in our operations, negatively impact customer relationships and make recruiting for future management positions more difficult.

Due to our relationship with Santander, we also are subject to indirect regulation by the European Central Bank, which imposes compensation restrictions that may apply to certain of our executive officers and other employees under Capital Requirements Directive 2013/36/EU (also known as CRD IV). These restrictions may impact our ability to retain our experienced management team and key employees and our ability to attract appropriately qualified personnel, which could materially and adversely affect our business, financial condition and results of operations.

Our risk management processes and procedures may not be effective in mitigating our risks.

Our risk management framework may not always effectively identify and control our risks, including, but not limited to, credit risk, market risk, strategic risk, liquidity risk and operational risk. In addition, there may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify and control our risks, both those we are aware of and those we do not anticipate, including as a result of changes in economic conditions, we could suffer unexpected losses that could have a material and adverse effect on our business, financial condition and results of operations.

We face significant risks in implementing our strategy, some of which are outside our control.

We intend to continue our strategy to expand our vehicle finance franchise by increasing market penetration via the number and depth of our relationships in the vehicle finance market, pursuing additional relationships with OEMs, expanding our direct-to-consumer footprint and growing our serviced for others platform. Our ability to execute this growth strategy is subject to significant risks, some of which are beyond our control, including:

• the inherent uncertainty regarding general economic conditions; our ability to obtain adequate financing for our expansion plans;

• the prevailing laws and regulatory environment of each state in which we operate or seek to operate, and, federal laws and regulations, to the extent applicable, which are subject to change at any time;

• the degree of competition in our markets and its effect on our ability to attract customers;

• our ability to recruit qualified personnel, in particular, in areas where we face a great deal of competition; and

• our ability to obtain and maintain any regulatory approvals, government permits, or licenses that may be required on a timely basis

Changes in our relationship with Santander may adversely affect our business, financial condition and results of operations.

Santander, through SHUSA, currently owns approximately 80.2% of our common stock. We rely on our relationship with Santander for several competitive advantages including relationships with OEMs and regulatory best practices and other commercial arrangements. Changes in our relationship with Santander, and changes affecting Santander, could materially and adversely affect our business, financial condition and results of operations.

Some of the risks we face as a result of potential changes in our relationship with, or changes affecting, Santander include the following:

• Santander has provided and continues to provide us with significant funding support, through both committed liquidity and opportunistic extensions of credit, as well as guarantees of our obligations under the governing documents of certain warehouse facilities and privately issued amortizing notes. For example, during the 2009 financial crisis, Santander and its affiliates provided us with more than $6 billion in financing that enabled us to pursue several acquisitions and/or conversions of vehicle loan portfolios at a time when most major banks were curtailing or eliminating their commercial lending activities. During 2017 and 2018 we sold eligible prime loans through our SPAIN securitization platform to Santander under a flow agreement. In addition, during 2018 the Company began provide origination services to SBNA for the origination of prime loans which are serviced by SC. If Santander or its affiliates elect not to provide such support, not to provide it to the same degree or not to enter into additional agreements, we may not be able to replace such support ourselves or to obtain substitute arrangements with third parties. We may be unable to obtain such support because of financial or other constraints, or be unable to implement substitute arrangements on a timely basis on terms that are comparable, or at all, which could materially and adversely affect our business, financial condition and results of operations.

• Santander may sell or otherwise reduce its equity interest in us. If Santander sells or otherwise reduces its equity interest in us, it may be less willing to provide us with the support it has provided in the past or to enter into agreements (such as our flow agreement with Santander or our origination services agreements with SBNA) with us on comparable terms, or at all, as it has in the past. In addition, our right to use the Santander name is on the basis of a non-exclusive, royalty-free, and non-transferable license from Santander, and only extends to uses in connection with our current and future operations within the United States. Santander may terminate such license at any time Santander ceases to own, directly or indirectly, 50% or more of our common stock. If we were required to change our name, we would incur the administrative costs and burden associated with revising legal documents and marketing materials, and also may experience loss of brand and loss of business or loss of funding due to consumers' and banks' relative lack of familiarity with our new name. Additionally, FCA may terminate the MPLFA if a person other than Santander and its affiliates or our other stockholders owns 20% or more of our common stock and Santander and its affiliates own fewer shares of common stock than such person.

• Some terms of our credit agreements are influenced by, among other things, the credit ratings of Santander. If Santander were to suffer credit rating downgrades or other adverse financial developments, we could be negatively impacted, either directly or indirectly. For example, Santander’s short-term credit ratings downgrades in 2012, from A-1 to A-2 (Standard & Poor's) and from P-1 to P-2 (Moody's), did not directly impact our cost of funds. However, due to the contractual terms of certain of our debt agreements, these downgrades resulted in the loss of our ability to commingle funds on most facilities. A similar downgrade today would result in an increase of approximately $1.75 million per month for cost of funds.

• Our relationship with Santander or SHUSA could reduce the willingness of other banks to develop relationships with us due to general competitive dynamics among such financial institutions.

Our business, financial condition and results of operations could be materially and adversely affected if used-vehicle values decline, resulting in lower residual values of our vehicle leases and lower recoveries in sales of repossessed vehicles.

General economic conditions, the supply of off-lease and other used vehicles to be sold, new vehicle market prices and marketing programs, vehicle brand image and strength, perceived vehicle quality, general consumer preference and confidence levels, tariff policy, seasonality, and overall price and price volatility of gasoline or diesel fuel, among other factors, heavily

influence used-vehicle values and thus the residual value of our leased vehicles and the amount we recover in remarketing repossessed vehicles. Our financial results are sensitive to used-vehicle values as leases continue to become a larger part of our business.

Our expectation of the residual value of a leased vehicle is a critical input in determining the amount of the lease payments at the inception of a lease contract. Our lease customers are responsible only for any deviation from expected residual value that is caused by excess mileage or excess wear and tear, while we retain the obligation to absorb any general market changes in the value of the vehicle. Therefore, our operating lease expense is increased when we have to take an impairment on our residual values or when the realized residual value of a vehicle at lease termination is less than the expected residual value for the vehicle at lease inception. In addition, the timeliness, effectiveness, and quality of our remarketing of off-lease vehicles affects the net proceeds realized from the vehicle sales. Lower used-vehicle values can reduce the amount we can recover when remarketing repossessed vehicles that serve as collateral on the underlying loans.

Used-vehicle values may decline in the future, and such declines in used-vehicle values could materially and adversely affect our business, financial condition and results of operations.

Our business, financial condition and results of operations could be materially and adversely affected if we fail to manage and complete divestitures.

We regularly evaluate our portfolio in order to determine whether an asset or business may no longer be aligned with our strategic objectives. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. We may also experience greater costs and dissynergies than expected, and the impact of the divestiture on our revenue may be larger than projected. Additionally, we may ultimately dispose of assets or a business at a price or on terms that are less favorable than those we had originally anticipated. After reaching a definitive agreement with a buyer, we typically must satisfy pre-closing conditions and the completion of the transaction may be subject to regulatory and governmental approvals. Failure of these conditions and approvals to be satisfied or obtained may prevent us from completing the transaction. Divestitures involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, and a decrease in revenues and earnings associated with the divested business. Divestitures may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside of our control could materially and adversely affect our business, financial condition and results of operations.

We continue to hold our Bluestem portfolio (personal lending business), which had a carrying balance of approximately $0.9 billion as of December 31, 2020, and we remain a party to agreements with Bluestem that obligate us, among other things, to purchase new advances originated by Bluestem and existing balances on accounts with new advances through April 2022. Both parties have the right to terminate this agreement upon written notice if certain events were to occur, including if there is a material adverse change in the financial condition of either party. Although we are seeking a third party to assume this obligation, we may not be successful in finding such a party, and Bluestem may not agree to the substitution. Until we find a third party to assume this obligation, there is a risk that material changes to our relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect our business, financial condition and results of operations. We continue to classify the Bluestem portfolio as held-for-sale. We have recorded significant lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as we hold the portfolio, particularly due to the new volume we are committed to purchase.

Our business, financial condition and results of operations could be materially and adversely affected if we are unsuccessful in developing and maintaining relationships with vehicle dealerships.

Our ability to originate and acquire loans and vehicle leases depends on our relationships with vehicle dealers. In particular, our vehicle finance operations depend in large part upon our ability to establish and maintain relationships with reputable vehicle dealers that direct customers to our offices or originate loans at the point-of-sale, which we subsequently purchase. Although we have relationships with certain vehicle dealers, none of our relationships is exclusive and any may be terminated at any time. In addition, an economic downturn or contraction of credit affecting either dealers or their customers could result in an increase in vehicle dealership closures or a decrease in the sales and loan volume of our existing vehicle dealer base, which could materially and adversely affect our business, financial condition and results of operation.

Our business, financial condition and results of operations could be materially and adversely affected if we are unsuccessful in developing and maintaining our "serviced for others" portfolio.

A significant portion of our business strategy is to increase the revenue stream from our "serviced-for-others" portfolio by continuing to add assets to this portfolio. For example, beginning in 2018, we agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail loans, primarily from Chrysler dealers, and to perform the servicing for any loans originated on SBNA’s behalf. We have servicing rights to certain third-party portfolios and we also serve as servicer in our securitization and may retain servicing rights in certain whole-loan sales. For the year-ended December 31, 2020, we maintained servicing rights for a portfolio with an outstanding principal balance of approximately $12 billion and we received servicing fees in the amount of $74 million. If an institution for which we currently service assets chooses to terminate our rights as servicer, or if we fail to add additional institutions or portfolios to our servicing platform, we may not achieve the desired revenue or income from this strategy.

We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could materially and adversely affect our business, financial condition and results of operations.

In deciding whether to approve loans or to enter into other transactions with borrowers and counterparties in our retail lending and commercial lending businesses, we may rely on information furnished to us by or on behalf of borrowers and counterparties, including financial statements and other financial information such as income. We also may rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in our loan originations or from our business clients. Any such misrepresented information could materially and adversely affect our business, financial condition and results of operations.

Negative changes in the business of the OEMs with which we have strategic relationships, including FCA, could materially and adversely affect our business, financial condition and results of operations.

A significant adverse change in FCA’s or other vehicle manufacturers’ business, including (i) significant adverse changes in their respective liquidity position and access to the capital markets, (ii) the production or sale of FCA or other vehicle manufacturers’ vehicles (including the effects of any product recall), (iii) the quality or resale value of FCA or other vehicles, (iv) the use of marketing incentives, (v) FCA’s or other vehicle manufacturers’ relationships with their key suppliers, (vi) FCA’s or other vehicle manufacturers’ bankruptcy or (vii) FCA’s or other vehicle manufacturers’ respective relationships with the United Auto Workers and other labor unions, and other factors impacting vehicle manufacturers or their employees could materially and adversely affect our business, financial condition and results of operations.

Under the MPLFA we originate private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised vehicle dealers. In the future, it is possible that FCA or other vehicle manufacturers with whom we have relationships could utilize other companies to support their financing needs, including offering products or terms that we would not or could not offer, which could materially and adversely affect our business financial condition and results of operations. Furthermore, FCA or other vehicle manufacturers could expand, establish or acquire captive finance companies to support their financing need; thus, reducing their need for our services.

There can be no assurance that the global vehicle market, or FCA’s or our other OEM partners’ share of that market, will not suffer downturns in the future, and any negative impact could in turn materially and adversely affect our business, financial condition and results of operations.

Future significant loan, lease or personal loan repurchase requirements could materially and adversely affect our business, financial condition and results of operations.

We have repurchase obligations in our capacity as servicer in securitizations and certain whole-loan sales. If a servicer breaches a representation, warranty or covenant with respect to the loans sold, the servicer may be required by the servicing provisions to repurchase that asset from the purchaser or otherwise compensate one or more classes of investors for losses caused by the breach. If significant repurchases of assets or other payments are required under our responsibility as servicer, it could materially and adversely affect our business, financial condition and results of operations. As we have increased the number of loans sold, the potential impact of such repurchases has increased.

We have treated sales of the debt and equity in certain of our securitizations as sales of the underlying finance receivables. The exercise of our clean-up call option on each of these securitizations when the collateral pool balance reaches 10%, or 15% of its

original balance (depending on the securitization structure) would result in the repurchase of the remaining underlying finance receivables.

Competition with other lenders could materially and adversely affect our business, financial condition and results of operations.

The vehicle finance market is very competitive and is served by a variety of entities, including the captive finance affiliates of major vehicle manufacturers, banks, savings and loan associations, credit unions, and independent finance companies. The market is highly fragmented, with no individual lender capturing more than 10% of the market. Our competitors often provide financing on terms more favorable to vehicle purchasers or dealers than we offer. Many of these competitors also have longstanding relationships with vehicle dealerships and may offer dealerships or their customers other forms of financing that we do not offer. We anticipate that we will encounter greater competition as we expand our operations and as the economy continues to improve.

Certain of our competitors are not subject to the same regulatory regimes that we are. As a result, these competitors may have advantages in conducting certain businesses and providing certain services, and may be more aggressive in their loan origination activities. Increasing competition could also require us to lower the rates we charge on loans in order to maintain loan origination volume, which could materially and adversely affect our business, financial condition and results of operations.

As described above, we rely upon our ability to sell securities in the ABS market and upon our ability to access various credit facilities to fund our operations. Some of our competitors may have lower cost structures, or funding costs, and be less reliant on securitizations than we are.

Goodwill and intangible asset impairments may be required in relation to acquired businesses.

We have made business acquisitions for which it is possible that the goodwill and intangible assets attributed to those businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the business' underlying profitability, asset quality or other relevant matters. Impairment testing with respect to goodwill and intangible assets is performed annually, or more frequently if impairment indicators are present. Goodwill and intangible asset impairment analysis and measurement is a process that requires significant judgment. Our stock price and various other factors affect the assessment of the fair value of our underlying business for purposes of performing any goodwill and intangible asset impairment assessment. We did not have any impairment on intangible assets during the years ended December 31, 2020, 2019 and 2018. There can be no assurance that we will not record additional impairments on intangible assets in the future or that such impairments will not be material.

Developments stemming from the United Kingdom’s withdrawal from membership in the European Union could have a material adverse effect on us.

The result of the United Kingdom’s (“UK’s”) referendum on whether to remain part of the European Union (“EU”) and its subsequent withdrawal from the EU on January 31, 2020 have had and may continue to have negative effects on global economic conditions and global financial markets. After the transition period provided in the UK's withdrawal agreement with the EU, the long-term nature of the UK’s relationship with the EU is unclear (including with respect to the laws and regulations that will apply as the UK determines which EU laws to replicate or replace) and, as negotiations continue, there is also considerable uncertainty as to the access of the UK to European markets and the access of EU member states to the UK’s markets following the transition period. The result of the referendum and the UK's subsequent withdrawal from the EU have created an uncertain political and economic environment in the UK, and may create such environments in other EU member states. While the Company does not maintain a presence in the UK, political and economic uncertainty in countries with significant economies and relationships to the global financial industry have in the past led to declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit, lower or negative interest rates, weaker economic growth and reduced business confidence on an international level, each of which could adversely affect our business.

Legal, Regulatory and Compliance Risks

We are a consumer finance company with operations in all 50 states and the District of Columbia. Our industry is highly regulated, and continually changing federal, state and local laws and regulations could materially and adversely affect our business, financial condition and results of operations.

We must comply with all of the laws and regulations applying to our business in each and every jurisdiction in which we operate. Due to the highly regulated nature of the consumer finance industry, we are required to comply with a wide and

changing array of federal, state and local laws and regulations, including a significant number of banking and anti-money laundering laws and fair lending, credit bureau reporting, privacy, usury, disclosure, debt collection, repossession and other consumer protection laws and regulations. These laws and regulations directly impact our origination and servicing operations and almost all other aspects of our business and require constant compliance, monitoring, and internal and external audits. Compliance with applicable laws and regulations is costly, may create operational constraints and may not always be effective or perform as expected.

The enactment of new laws and regulations impacting the consumer finance industry could occur rapidly and unpredictably and could require us to change our business or operations, resulting in a loss of revenue or a reduction in our profitability. New laws and regulations could also result in financial loss due to regulatory fines or penalties, restrictions or suspensions of business, or costs associated with compliance or mandatory corrective action as a result of failure to adhere to applicable laws, regulations and supervisory guidance. Failure to comply with these laws and regulations could also give rise to regulatory sanctions, customer rescission rights, actions by government and self-regulatory bodies, civil or criminal liability or damage to our reputation.

We are involved in investigations, examinations and proceedings by government and self-regulatory bodies, which may materially and adversely affect our business, financial condition and results of operations.

I n recent years, the supervision and regulation of consumer finance companies have expanded greatly. As an ordinary course of business, we are involved in formal and informal reviews, investigations, examinations, proceedings and information-gathering requests by government and self-regulatory bodies, including, among others, the FRBB, the CFPB, the DOJ, the SEC, the FTC and various federal and state regulatory and enforcement agencies.

We are and have been subject to such matters by many of these regulators in the past and have paid significant fines or provided significant other relief. For more information about these matters, please refer to Note 15- “Commitments and Contingencies” in the accompanying consolidated financial statements. We could also become subject to other or similar regulatory actions in the future. Given the inherent uncertainty involved in such matters, and the potentially large or indeterminate damages sought, there can be significant uncertainty regarding the liability we may incur as a result of these matters. The finding, or even the assertion of, legal liability against us could result in higher operational and compliance costs, could materially and adversely affect our business, financial condition and results of operations and may result in, among other actions, adverse judgments, significant settlements, fines, penalties, injunctions or substantial reputational harm.

We are subject to enhanced legal and regulatory scrutiny regarding credit bureau reporting, origination and debt collection practices from regulators, courts and legislators.

Consumer finance companies, including us, are subject to enhanced legal and regulatory scrutiny regarding credit bureau reporting, origination and debt collection practices from regulators, courts and legislators. Our balance sheet consists of predominantly nonprime consumers, which are associated with higher than average delinquency rates and charge-offs than prime consumers. Accordingly, we have significant involvement with credit bureau reporting, origination and the collection and recovery of delinquent and charged-off debt, primarily through customer communications, the periodic sale of charged-off debt and vehicle repossession. Any future changes to our business practices in these areas, including our debt collection practices, whether mandated by regulators, courts, legislators or otherwise, or any legal liabilities resulting from our business practices, including our debt collection practices, could increase our operational or compliance costs and could materially and adversely affect our business, financial condition and results of operations.

We are subject to certain banking regulations that limit our business activities and may restrict our ability to take other capital actions and enter into certain business transactions.

Because our controlling shareholder, SHUSA, is a bank holding company and because we provide third-party services to banks, we are directly and indirectly subject to certain banking and financial services regulations, including oversight by the FRBB, the ECB and the OCC. We also are subject to oversight by the CFPB. Such regulations and oversight could limit the activities and the types of businesses that we may conduct. The FRBB has broad enforcement authority over bank holding companies and their subsidiaries. The FRBB could exercise its power to restrict SHUSA from having a non-bank subsidiary that is engaged in any activity that, in the FRBB’s opinion, is unauthorized or constitutes an unsafe or unsound business practice, and could exercise its power to restrict us from engaging in any such activity. This power includes the authority to prohibit or limit the payment of dividends if, in the FRBB’s opinion, such payment would constitute an unsafe or unsound practice. Moreover, certain banks and bank holding companies, including SHUSA, are required to perform a stress test and submit a capital plan to the FRBB on an annual basis, and to receive a notice of non-objection, or approval, to the plan from the FRBB before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing

capital instruments. Any future suspension of our ability to pay dividends or other limitations placed on us by the FRBB, the ECB or any other regulator and additional costs associated with regulatory compliance could materially and adversely affect us and the trading price of our common stock.

Further, the Company is subject to the Interim Policy, which has been extended by the Federal Reserve Board through the first quarter of 2021. The Interim Policy prohibits share repurchases and limits dividends for all CCAR institutions, including SHUSA, to such institution’s average trailing net income. Although the Company's standalone income is sufficient to pay a dividend, the Company is consolidated into SHUSA’s capital plan that utilizes its average trailing income to determine the applicable cap on capital actions under the Interim Policy. Based on SHUSA’s expected average trailing four quarters of net income, the Company was prohibited from paying a dividend in the fourth quarter of 2020 and, unless the Company obtains an exception from the Federal Reserve Board, will be prohibited from paying a dividing in the first quarter of 2021. Also, the Company is prohibited from implementing share repurchase plans, except to repurchase a number of shares of the Company's common stock equal to the amount of share issuances related to the Company’s expensed employee compensation.

While the Federal Reserve Board's extension of Interim Policy expires on March 31, 2021, there can be no assurance that the Federal Reserve Board will not extend the Interim Policy, that the Federal Reserve Board will grant any exceptions to the Interim Policy, or that other similar restrictions on the taking of capital actions, including dividend payments and stock repurchases and redemptions, will not apply to us in the future.

The FRBB, the ECB or any other regulator may also impose substantial fines and other penalties for violations that we may commit or disallow acquisitions or other activities we may contemplate, which may limit our future growth plans. These limitations could place us at a competitive disadvantage because some of our competitors are not subject to these limitations.

We are subject to enhanced prudential standards as a subsidiary of SHUSA, which could materially and adversely affect our business, financial condition and results of operations.

As a subsidiary of SHUSA, we are subject to certain enhanced prudential rules mandated by Section 165 of the Dodd-Frank Act. Among other requirements, these rules require SHUSA to maintain a sufficient quantity of highly liquid assets to survive a liquidity stress event and implement various liquidity-related corporate governance measures and imposes certain requirements, duties and qualifications for the risk committee and chief risk officers of SHUSA. SHUSA calculates its liquidity figures on a consolidated basis with certain of its subsidiaries, including us. As a result, our predicted performance under the liquidity stress event must be taken into account when SHUSA conducts its liquidity stress event analysis. Due to these requirements, we are required to have an increased amount of liquidity and will incur increased costs of funding and liquidity capacity, which could materially and adversely affect our business, financial condition and results of operations.

Our business, financial condition and results of operations may be materially and adversely affected upon our implementation of the capital requirements under the U.S. Basel III final rules.

SHUSA is governed by federal banking regulations relating to capital, referred to as the U.S. Basel III final rules, which subject SHUSA to minimum risk-based capital ratios and a capital conservation buffer above these minimum ratios. SHUSA calculates its capital figures on a consolidated basis with certain of its subsidiaries, including us. Failure to remain well-capitalized would result in restrictions on our ability to take capital actions, including dividend payments and stock repurchases and redemptions, and to pay discretionary bonuses to executive officers.

If SHUSA were to fail to satisfy regulatory capital requirements, SHUSA, together with its subsidiaries, including us, may become subject to informal or formal supervisory actions by the FRBB. If any of these were to occur, such actions could prevent us from successfully executing our business plan and could materially and adversely affect our business, financial condition and results of operations.

The Dodd-Frank Act, and its associated rules and guidance, and CFPB supervisory audits will likely continue to increase our regulatory compliance burden and associated costs.

The Dodd-Frank Act introduced a substantial number of reforms that continue to reshape the tenor and structure of regulations affecting the consumer finance industry, including us. In particular, the Dodd-Frank Act, among other things, created the CFPB, which is authorized to promulgate and enforce consumer protection regulations relating to financial products and services.

The CFPB continues to recommend that indirect vehicle lenders, a class that includes us, take steps to monitor and impose controls over dealer markup policies where dealers charge consumers higher interest rates as compensation for facilitating the loan, with the markup shared between the dealer and the lender. The CFPB has conducted in the past, and continues to conduct,

supervisory audits of large providers of vehicle financing, including us, with respect to possible ECOA “disparate impact” credit discrimination in indirect vehicle finance and other related matters. The CFPB and the DOJ have continued to enter into consent orders, memoranda of understanding and settlements with multiple lenders pertaining to allegations of disparate impact regarding vehicle dealer markups, requiring consumer financing companies, including us, to revise their pricing and compensation systems to substantially reduce dealer discretion and other financial incentives to mark up interest rates and to pay restitution to borrowers as well as fines and penalties.

If the CFPB continues to enter into consent decrees with lenders on disparate impact claims and related matters, it could negatively impact the business of the affected lenders, and potentially the business of dealers and other lenders in the vehicle finance market. This impact on dealers and lenders could increase our regulatory compliance requirements and associated costs.

There may be further material changes in the way instit utions like us are regulated, and the results of the 2020 elections make regulatory reforms and changes to the supervisory approach by our regulators more likely. Although it remains difficult to predict the exact impact these changes will have on our business, financial condition, results of operations and cash flows for a particular future period, further reforms could result in loss of revenue, higher compliance costs, additional limits on our activities, constraints on our ability t o enter into new business and other adverse effects on our business.

Unlike competitors that are banks, we are subject to the licensing and operational requirements of states and other jurisdictions, and our business would be adversely affected if we lost our licenses.

Because we are not a nationally-chartered depository institution, we do not benefit from exemptions to state loan servicing or debt collection licensing and regulatory requirements. To the extent that they exist, we must comply with state licensing and various operational compliance requirements in all 50 states and the District of Columbia. These include, among others, requirements regarding form and content of contracts, other documentation, collection practices and disclosures, and record keeping. We are sensitive to regulatory changes that may increase our costs through stricter licensing laws, disclosure laws or increased fees.

In addition, we are subject to periodic examinations by state and other regulators. The states that currently do not provide extensive regulation of our business may later choose to do so. Failure to comply with licensing or permit requirements and other local regulatory requirements could result in significant statutory civil and criminal penalties, monetary damages, attorneys’ fees and costs, possible review of licenses, and damage to reputation, brand and valued customer relationships.

We are subject to potential intervention by any of our regulators or supervisors.

As noted above, our business and operations are subject to increasingly significant rules and regulations applicable to conducting banking and financial services business. These apply to, among other things, financial reserves and financial reporting. These requirements are set by the relevant central banks and state and federal regulatory authorities that authorize, regulate and supervise us in the jurisdictions in which we operate.

In their supervisory roles, the regulators seek to maintain the safety and soundness of financial institutions and the financial system as a whole, with the aim of strengthening, but not guaranteeing, the protection of customers and the financial system. The supervisors’ continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential examinations and requests, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, these regulators have a more outcome-focused regulatory approach that involves more proactive enforcement and more punitive penalties for infringement. As a result, we face increased supervisory intrusion and scrutiny, that result in increasing internal compliance costs and supervision fees. In the event we fail to meet regulatory obligations or expectations we are likely to face more regulatory fines. Some of the regulators focus intensely on consumer protection and on conduct risk, and have stated that they will continue to do so. This has included a focus on the design and operation of products, the treatment of customers and the operation of markets.

Some of the laws in the jurisdictions in which we operate give the regulators the power to make temporary product intervention rules either to improve a firm’s systems and controls in relation to product design, product management and implementation, or to address problems identified with financial products. These problems may potentially cause significant detriment to consumers because of certain product features or governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such matters have been resolved. Some of the regulatory regimes in the relevant jurisdictions in which we operate require us to be in compliance across all aspects of our business, including the training, authorization and supervision of personnel, systems, processes and documentation. If we fail to

be compliant with such regulations, there likely would be an adverse impact on our business from sanctions, fines or other actions imposed by the regulatory authorities.

Cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus, which will likely increase our regulatory compliance burden and associated costs.

Regulatory agencies have proposed enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers, including [certain aspects of our operations], and would focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience and situational awareness. Several states have also proposed or adopted cybersecurity and data privacy legislation and regulations, including the California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020, which require, among other things, notification to affected individuals when there has been a security breach of their personal data and increase the privacy and security obligations of entities handling certain personal information of individuals.

We receive, process, maintain, transmit and store proprietary information and sensitive or confidential data, including public and non-public personal information of our customers, employees and counterparties, including, but not limited to, personally identifiable information and personal financial information. The collection, sharing, use, retention, disclosure, protection, transfer and other processing of this information is governed by U.S. federal and state law and is increasingly subject to legislation and regulation.

Data protection and privacy law regimes continue to evolve and may result in ever-increasing public scrutiny and escalating levels of enforcement and sanctions. We may become subject to new legislation or regulation concerning cybersecurity or data protection and privacy, which could require us to incur additional costs and expenses in an effort to comply. We could also be adversely affected if new legislation or regulations are adopted or if existing legislation or regulations are modified to require us to alter our systems or modify our business practices or privacy policies. If cybersecurity, data privacy, data protection, data transfer or data retention laws are implemented, interpreted or applied in a manner inconsistent with our current practices, we may be subject to fines, litigation or regulatory enforcement actions or ordered to change our business practices, policies or systems in a manner that adversely impacts our operating results.

Adverse outcomes to current and future litigation against us may materially and adversely affect our business, financial condition and results of operations.

We are party to various litigation claims and legal proceedings. Refer to Note 15- “Commitments and Contingencies” in the accompanying financial statements. As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against us could take the form of class action complaints by consumers or shareholder derivative complaints, and we are party to multiple purported securities class action lawsuits and shareholder derivative complaints. As the assignee of loans originated by vehicle dealers, we also may be named as a co-defendant in lawsuits filed by consumers principally against vehicle dealers.

Customers of financial services institutions, including our customers, may seek redress for loss as a result of inaccuracies or misrepresentations made during the sale of a particular product or through incorrect application of the terms and conditions of a particular product. An adverse outcome in litigation related to these matters, any penalties imposed or compensation awarded and the costs of defending the litigation could harm our reputation or materially and adversely affect our business, financial condition and results of operations.

Negative publicity associated with litigation, governmental investigations, regulatory actions and other public statements could damage our reputation.

From time to time, there are negative media stories about us or the nonprime credit industry. These stories may follow the announcement of actual or threatened litigation or regulatory actions involving us or others in our industry. Our ability to attract consumers is highly dependent upon external perceptions of our level of service, trustworthiness, business practices and financial condition. Negative publicity about such matters, our alleged or actual practices, or our industry generally could materially and adversely affect our business, financial condition and results of operations, including our ability to retain and attract employees.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The

effects of any changes that result from enactment of future tax reforms cannot be quantified, and there can be no assurance that any such reforms would not materially and adversely affect our business, financial condition and results of operations.

Liquidity and Funding Risks

Our business, financial condition and results of operations could be materially and adversely affected if our access to funding is reduced.

We rely upon our ability to sell securities in the ABS market and upon our ability to access various credit facilities to fund our operations. The ABS market, along with credit markets in general, have experienced significant disruptions in the past, during which certain issuers have experienced increased risk premiums while there was a relatively lower level of investor demand for certain ABS (particularly those securities backed by nonprime collateral). Decreased demand for lower credit grade ABS could restrict our ability to access the ABS market for nonprime collateralized receivables. Also, regulatory reforms enacted under the Dodd-Frank Act generally require us to retain a minimum specified portion (5%) of the credit risk on assets collateralizing ABS issuances which could potentially reduce the amount of liquidity otherwise generally available through ABS programs. These and other adverse changes in our ABS program or in the ABS market generally, including rising interest rates, could materially adversely affect our ability to securitize loans on a timely basis or upon terms acceptable to us. This could increase our cost of funding, reduce our margins or delay issuing until investor demand improves. We also depend on various credit facilities to fund our future liquidity needs.

We continue to require a significant amount of liquidity to finance our volume of loan acquisitions and originations. We require borrowing capacity through credit facilities. The availability of these financing sources depends, in part, on our ability to forecast necessary levels of funding as well as on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit, the financial strength and strategic objectives of Santander and the other banks that participate in our credit facilities and the availability of bank liquidity in general. We may also experience the occurrence of events of default or breach of financial covenants, which could reduce our access to bank funding. In the event of a sudden or unexpected shortage of funds in the banking system, we cannot guarantee that these financing sources will continue to be available beyond the current maturity dates, on reasonable terms, or at all.

We are subject to general market conditions that affect issuers of ABS and other borrowers, and we could experience increased risk premiums or funding costs in the future. In addition, if the sources of funding described above are not available to us on a regular basis for any reason, we may have to curtail or suspend our loan acquisition and origination activities. Downsizing the scale of our business could materially and adversely affect our business, financial condition and results of operations.

Poor portfolio performance may trigger credit enhancement provisions in our revolving credit facilities or secured structured financings.

Our revolving credit facilities generally have net spread, delinquency and net loss ratio limits on the receivables pledged to each facility that, if exceeded, would potentially increase the level of credit enhancement requirements and/or redirect all excess cash to the credit providers. Generally, these limits are calculated based on the portfolio collateralizing the respective credit line; however, for certain of our warehouse facilities, delinquency and net loss ratios are calculated with respect to our serviced portfolio as a whole. Our facilities used to finance vehicle lease originations also have a residual loss ratio limit calculated with respect to our serviced lease portfolio as a whole based on maturing leases returned to us.

The documents that govern certain secured structured financings also contain cumulative net loss ratio triggers on the receivables included in each securitization Trust. If, at any measurement date, the cumulative net loss ratio were to exceed the specified limits, provisions of the financing agreements would increase the target level of credit enhancement for that financing and delay excess cash payments to the residual holder of the ABS, which is generally us. Excess cash flows, if any, from the facility would be used to fund the increased credit enhancement levels rather than being distributed to us. Once an impacted Trust reaches the new requirement, we would return to receiving a residual distribution from the Trust.

We apply financial leverage to our operations, which may materially adversely affect our business, financial condition and results of operations.

We currently apply financial leverage, pledging most of our assets to credit facilities and securitization Trusts, and we intend to continue to apply financial leverage in our retail lending operations. Our debt-to-assets ratio is 84.1% as of December 31, 2020. Although our total borrowings capacity is defined in our lending agreements, we may change our target borrowing levels at any time. Incurring substantial debt subjects us to the risk that our cash flow from operations may be insufficient to service our outstanding debt.

Our indebtedness and other obligations are significant, impose restrictions on our business and could materially and adversely affect our business and ability to react to changes in the economy or our industry.

We have a significant amount of indebtedness. At December 31, 2020 and 2019, we had a pproximately $41.1 billion and $39.2 billion, respectively, in principal amount of indebtedness outstanding (including $30.3 billion and $33.5 billion, respectively, in secured indebtedness). Interest expense on our indebtedness constituted 20% of our total net finance and other interest income, net of leased vehicle expense, for the year ended December 31, 2020.

Our debt reduces operational flexibility and creates default risks. Our revolving credit facilities contain a borrowing base or advance rate formula that requires us to pledge finance contracts in excess of the amounts that we can borrow under the facilities. Accordingly, increases in delinquencies or defaults resulting from weakened economic conditions would require us to pledge additional finance contracts to support the same borrowing levels and may cause us to be unable to securitize loans to the extent we desire. These outcomes could materially and adversely affect our business, financial condition and results of operations, including our liquidity.

Additionally, the credit facilities generally contain various covenants requiring, in certain cases, minimum financial ratios, asset quality and portfolio performance ratios (portfolio net loss and delinquency ratios, and pool level cumulative net loss ratios), as well as limits on deferral levels. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain of our third-party credit facilities, delinquency and net loss ratios are calculated with respect to our serviced portfolio as a whole. Covenants in the agreements governing our debts may also limit our ability to:

• incur or guarantee additional indebtedness;

• purchase large loan portfolios in bulk;

• sell assets, including our loan portfolio or the capital stock of our subsidiaries;

• enter into transactions with affiliates;

• create or incur liens; and

• consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.

Additionally, certain of our credit facilities contain minimum tangible net worth requirements, and certain of our credit facilities contain covenants that require timely filing of periodic reports with the SEC. Failure to meet any of these covenants, or to obtain a waiver for any such failure, could result in an event of default under these agreements. If an event of default occurs under these agreements, potential actions lenders may take on certain debt agreements include declaring all amounts outstanding under these agreements to be immediately due and payable, enforcing their interests against collateral pledged under these agreements, restricting our ability to obtain additional borrowings under these agreements and/or removing us as servicer. Such an event of default could materially and adversely affect our business, financial condition and results of operations, including our liquidity.

If our debt service obligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, we may be required to dedicate a significant portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.

In addition, certain of our funding arrangements may require us to make payments to third parties if losses exceed certain thresholds, including, for example, certain of our flow agreements and arrangements with certain third-party loan originators of loans that we purchase on a periodic basis.

Credit Risks

Our business, financial condition, liquidity and results of operations depend on the credit performance of our loans.

As of December 31, 2020, more than 76% of our vehicle consumer loans are nonprime receivables with obligors who may not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. These loans experience higher default rates than a portfolio of obligations of prime obligors. In the event of a default on a vehicle loan, generally the most practical alternative for recourse by the lender is repossession of the financed vehicle, although the collateral value of the vehicle usually does not cover the outstanding account balance and costs of recovery. Repossessions and foreclosure sales that do not yield sufficient proceeds to repay the receivables in full could result in losses on those receivables.

We are exposed to geographic customer concentration risk. As of December 31, 2020, borrowers on the Company’s retail installment contracts held for investment are located in Texas (16%), Florida (11%), California (8%), Georgia (5%) and other states each individually representing less than 5% of the Company’s total portfolio. An economic downturn or catastrophic event that disproportionately affects certain geographic regions could materially and adversely affect our business, financial condition and results of operations, including the performance of our loan portfolio.

Our allowance for credit losses and impairments may prove to be insufficient to absorb losses inherent in our loan portfolio.

Our adoption of the new standard on the measurement of credit losses on financial instruments and its resulting impact on our allowance for credit losses and impairments may prove to be insufficient to absorb expected current expected credit losses in our loan portfolio.

The CECL standard introduced a new credit reserving framework, which replaces the incurred loss impairment framework in previous GAAP with one that reflects expected credit losses over the full expected life of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changed the accounting framework for purchased credit deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it is under the current OTTI framework.

The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost and net investment in leases. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previous applicable GAAP.

Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts and other relevant factors in accordance with US GAAP and based on regulatory requirements. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Future reserves may be different due to changes in macroeconomic conditions. Credit loss expenses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover expected credit losses in the Company’s HFI loan portfolios.

The process for determining our allowance for credit losses is complex, and we may from time to time make changes to our process for determining our allowance for credit losses. In addition, regulatory agencies periodically review our allowance for credit losses, as well as our methodology for calculating our allowance for credit losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments different than those of management. Changes that we make to enhance our process for determining our allowance for credit losses may lead to an increase in our allowance for credit losses. Any increase in our allowance for credit losses will result in a decrease in net income and capital, and may have a material adverse effect on us. Material changes to our methodology for determining our allowance for credit losses could result in the need to restate our financial statements or fines, penalties, potential regulatory action and damage to our reputation.

As it relates to COVID-19, management has factored the uncertainty and management’s potential responses (including the impact of defaults and extension requests) into the future projections of expected credit losses and reasonable and supportable forecast periods.

On a quarterly basis, macroeconomic scenarios with various different assumptions surrounding economic growth or decline in the economy are reviewed and approved by management’s Committee. The selection of scenarios and their associated weightings are critical inputs to determining management’s view of future economic conditions to support a reasonable and supportable forecast period and include significant assumptions of future economic performance, which could differ materially from actual outcomes.

Market Risks

Adverse macroeconomic conditions in the United States and worldwide may materially and adversely affect our business, financial condition and results of operations.

We are subject to changes in macroeconomic conditions that are beyond our control, and the macroeconomic environment remains susceptible to global events and volatility. A significant deterioration in economic conditions in the United States or worldwide could materially and adversely affect our business, financial condition and results of operations, including periods of slow economic growth; inflation and unemployment rates; changes in the availability of consumer credit and other factors that

impact consumer confidence, demand for credit, payment patterns, bankruptcies or disposable income; natural or man-made disasters, outbreaks, acts of war, terrorist attacks and the escalation of military activity; confidence in financial markets; the availability and cost of capital; interest rates and commodity prices (including gasoline prices); and geopolitical matters.

Some of the risks we face as a result of changes in these and other economic factors include the following:

• Loss rates could increase. Our balance sheet consists of predominantly nonprime consumers, who are associated with higher-than-average delinquency rates. The actual rates of delinquencies, defaults, repossessions and losses from nonprime loans could be more dramatically affected by a general economic downturn than other loans.

• Consumer demand for, and the value of, new and used vehicles and other consumer products securing outstanding accounts could decrease, including as a result of technological advancements or changes to trends in the automobile industry such as new autonomous driving technologies or car- and ride-sharing programs. Decreased demand would weaken collateral coverage and increase the amount of losses in the event of default.

• Servicing costs could increase without a corresponding increase in our finance charge income.

• Our compliance costs may increase as a result of increased regulation enacted in response to deterioration in economic conditions.

• Dealership closures and decreases in sales and loan volume by our existing vehicle dealer base may occur, which could result in the reduction in scale of our business.

• Financial market instability and volatility could negatively affect our liquidity and funding costs.

Changes in interest rates may adversely impact our profitability and risk profile.

Like other consumer finance companies, our profitability may be directly affected by interest rate levels and fluctuations in interest rates. As interest rates change, our gross interest rate spread on originations either increases or decreases because the rates charged on the contracts originated or purchased from dealers are limited by market and competitive conditions, restricting our ability to pass on increased interest costs to the consumer.

After a period of rising interest rate environment, during the years of 2016-2018, the Federal Reserve decreased interest rates multiple times in 2019, reversing most of the interest rate increases made during 2018. Among the reasons presented by the Federal Open Market Committee for the interest rates cut are the concerns about slowing global growth and trade war and their impact on the United States economy, which remained this year with low levels of unemployment rates and a persistent economy growth.

The Company relies on different source of funds, fixed rate and floating rate funding. For the floating rate funding, if interest rates move upward, net interest income can decrease because of the repricing of funds at a higher rate. For that purpose, we enter in derivative transactions for hedging purposes to mitigate or reduce the impact of the incremental interest rates. Additionally, although the majority of our borrowers are nonprime and are not highly sensitive to interest rate movement, increases in interest rates may reduce the volume of loans we originate. While we monitor the interest rate environment and employ hedging strategies designed to mitigate the impact of increased interest rates, we cannot provide assurance that hedging strategies will fully mitigate the impact of changes in interest rates.

Uncertainty regarding LIBOR may adversely affect our business.

The UK Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021. This announcement has resulted in uncertainty about the future of LIBOR and other rates used as interest rate “benchmarks,” and suggests that the continuation of LIBOR on the current basis will not be guaranteed after 2021, and that LIBOR could be discontinued or modified by 2021.

Several international working groups are focused on transition plans and alternative contract language seeking to address potential market disruption that could arise from the replacement of LIBOR with a new reference rate. For example, in the U.S., the Alternative Reference Rates Committee, a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York and comprised of private sector entities, banking regulators and other financial regulators, including the SEC, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on observable U.S. Treasury-backed repurchase transactions. In addition, ISDA is working to develop alternative contract language applicable in the event of LIBOR’s discontinuation that could apply to derivatives entered into on ISDA documentation. Separately, the SEC issued a statement in July 2019 encouraging market participants to focus on managing the transition from LIBOR prior to 2021 to avoid business and market disruptions, including incorporating fallback language in contracts in the event LIBOR is unavailable and proactive negotiations with counterparties to existing contracts that utilize LIBOR as a reference rate.

On November 30, 2020, ICE Benchmark Administration, or IBA, the administrator of LIBOR, with the support of the United States Federal Reserve and the UK Financial Conduct Authority, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021.

There can be no assurance that we and other market participants will be adequately prepared for an actual discontinuation of LIBOR, or of the timing of the adoption and degree of integration of alternative reference rates in financial markets relevant to us. For example, we may not successfully identify all existing contracts with LIBOR exposure or, even if we do successfully identify all such contracts, we may not successfully include provisions in those contracts specifying a method for transitions from LIBOR to an alternative benchmark rate. If LIBOR ceases to exist, or if new methods of calculating LIBOR are established, interest rates on our loans, deposits, derivatives and other financial instruments tied to LIBOR, as well as revenue and expenses associated with those financial instruments, may be adversely affected, and financial markets relevant to us could be disrupted.

Even if financial instruments are transitioned to alternative reference rates successfully, the new reference rates are likely to differ from the previous reference rates, and the value and return on those instruments could be adversely impacted. We could also be subject to increased costs due to paying higher interest rates on our existing financial instruments. We could incur legal risks in the event of such changes, as renegotiation and changes to documentation for new and existing transactions may be required, especially if parties to an instrument cannot agree on how to effect the transition. We could also incur further operational risks due to the potential need to adapt information technology systems, trade reporting infrastructure, and operational processes and controls, including models and hedging strategies.

In addition, it is possible that LIBOR will perform differently in the period leading up to its discontinuation than in the past if LIBOR quotes will become unavailable prior to December 31, 2021. This could result, for example, if a sufficient number of banks decline to make submissions to the LIBOR administrator. Interest rates could be higher or lower than they would have been if LIBOR was available in the current form and in these scenarios, risks associated with the transition away from LIBOR would be accelerated for us and the rest of the financial industry.

We are subject to market, operational and other related risks associated with our derivative transactions that could materially and adversely affect our business, financial condition and results of operations.

We enter into derivative transactions for economic hedging purposes. We are subject to market and operational risks associated with these transactions, including basis risk, the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost, credit or default risk, the risk of insolvency, or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral. Additionally, certain of our derivative agreements may require us to post collateral when the fair value of the derivative is negative. Our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a great extent, on our information technology systems.

Technology Risks

A successful security breach or a cyber-attack could materially and adversely affect our business, financial condition and results of operations.

In the normal course of business as a consumer finance company, we collect, process and retain sensitive and confidential consumer information and may, subject to applicable law share that information with our third-party service providers. This information is valuable to cyber-criminals and threat actors. Our facilities and systems, and those of third-party service providers could be vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events. A security breach or cyber-attack of our computer systems could interrupt or damage our operations or harm our reputation. If third parties or our employees are able to penetrate our network security or otherwise misappropriate our customers’ personal information or contract information, or if we give third parties or our employees improper access to consumers’ personal information or contract information, we could be subject to liability. This liability could include investigations, fines or penalties imposed by state or federal regulatory agencies or other government or self-regulatory bodies, including the loss of necessary permits or licenses. This liability could also include identity theft or other similar fraud-related claims, claims for other misuses, or losses of personal information, including for unauthorized marketing purposes or claims alleging misrepresentation of our privacy and data security practices.

We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure online transmission of confidential consumer information. Advances in computer capabilities new discoveries in the field of cryptography, vulnerabilities in third-party products, or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive consumer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend capital and other resources to protect against such security breaches or cyber-attacks, or to alleviate problems caused by such breaches or attacks.

We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our information technology systems used to operate our business and to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur increased insurance premiums or significant costs in our attempt to modify or enhance our protective measures against such attacks, to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. If we fail to effectively manage our cyber-security risk by failing to update our systems and processes in response to new threats, this could harm our reputation and materially and adversely affect our business, financial condition and results of operations through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets.

Further, successful cyber-attacks of other market participants, whether or not we are impacted, could lead to a general loss of customer confidence that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the financial system in general.

We are subject to many industry-specific and non-specific privacy laws. Further, our business is exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter or prevent employee misconduct; and the precautions we take to detect and prevent this activity may not always be effective. In addition, we may be required to report events related to information security issues (including any cyber-security issues), events where customer information may be compromised, unauthorized access and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us.

An outage or a high-severity disruption of our information technology platforms could materially and adversely affect our business operations.

Our technology platforms, underlying infrastructure and infrastructure of integrated third-party services are important to our operating activities, and any high-severity incidents or outages could disrupt our ability to process loan applications, originate loans or service our existing loan portfolios, which could materially and adversely affect our operating activities. We also rely on our technology platforms to process transaction information and produce financial reports. Outages may be caused by unforeseen catastrophic events, including natural or man-made disasters, outbreaks, terrorist attacks, large-scale power outages, software or hardware defects, computer viruses, cyber-attacks, external or internal security breaches, acts of vandalism, misplaced or lost data, programming or human errors, or other similar events. We cannot be certain that our business continuity plan will function as intended, or otherwise resolve or compensate for such effects. Such a failure in business continuity, if and when experienced, may materially and adversely affect our business, financial condition and results of operations, including our ability to support and service our customer base and produce financial reports.

Our technology platforms may not be adequate for our business or provide a competitive advantage.

Due to the continued rapid changes in technology, including in the consumer finance industry, and potential for digital market disruptors to augment consumer digital behaviors, there can be no assurance that our technology platforms will be adequate for our business or provide a competitive advantage. Additionally, we may not be able to effectively implement new technology-driven products and services as quickly as some of our competitors or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the consumer financing industry could harm our ability to compete with our competitors and materially and adversely affect our business, financial condition and results of operations.

Financial Reporting and Control Risks

We are required to make significant estimates and assumptions in the preparation of our financial statements, and our estimates and assumptions may not be accurate. We also rely on pricing, accounting, risk management and other models which may fail to accurately predict outcomes.

The preparation of our consolidated financial statements in conformity with GAAP requires our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods. We also use estimates and assumptions in determining the residual values of leased vehicles. Critical estimates are made by management in determining, among other things, the allowance for credit losses, amounts of impairment and valuation of income taxes. The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the quality of our assets. If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially and adversely affected.

We use models in various aspects of our business, including for pricing our extensions of credit, accounting determinations, risk management and other purposes and to assist with certain business decisions, and these models rely on many estimates and assumptions. The estimates and assumptions embedded in our models may prove to be inaccurate and furthermore our models may include deficiencies such as errors in coding or formulas, incorrect input or gathering of data, insufficient control over model changes and use of models other than for their intended purposes. If our models fail to accurately predict outcomes, we may not make appropriate business or financial decisions which could materially and adversely affect our financial condition and results of operations, including our capitalization and our relationships with regulators, customers and counterparties.

Furthermore, the Financial Accounting Standards Board, the SEC or other regulatory bodies may change the financial accounting and reporting standards to which we are subject, including those related to assumptions and estimates we use to prepare our financial statements. These changes may occur in ways we cannot predict and may impact our financial statements.

Lapses in internal controls, including internal control over financial reporting, could materially and adversely affect our business, financial condition and results of operations, including our liquidity and reputation.

We have previously identified material weaknesses in the controls around our financial reporting process, which contributed to the restatement of the previously filed consolidated financial statements. Though we consider all of these material weaknesses remediated, there can be no assurance that we will not suffer other material weaknesses in the future. If we fail to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in other material misstatements of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements, limit our ability to raise capital or increase the cost of financing we obtain, or have a negative effect on the trading price of our common stock. Additionally, failure to maintain effective internal controls over financial reporting may materially and adversely affect our business, financial condition and results of operations, and could impair our ability to timely file our periodic reports with the SEC and other overseeing regulators, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

Internal control over financial reporting may not prevent or detect all errors or acts of fraud.

Our disclosure controls and internal controls may not achieve, and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override of such controls. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis. The failure of our controls to be effective could materially and adversely affect our business, financial condition and results of operations, including the market for our common stock, and could subject us to regulatory scrutiny and penalties.

Failure to timely satisfy obligations associated with being a public company may have adverse regulatory, economic and reputational consequences.

As a public company, we are required to prepare and file periodic reports containing our consolidated financial statements with the SEC, prepare and distribute other stockholder communications in compliance with our obligations under the federal

securities laws and applicable stock exchange rules, evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board (PCAOB); involve and retain outside legal counsel and accountants in connection with the activities listed above; maintain an investor relations function; and maintain internal policies, including those relating to disclosure controls and procedures.

Failure to file our periodic reports timely with the SEC or to otherwise comply with our obligations associated with being a public company may result in similar or other more significant adverse regulatory, economic and reputational consequences.

Risks and Other Considerations Related to Our Common Stock

So long as SHUSA controls us, our other stockholders will have limited ability to influence matters requiring stockholder approval, and Santander’s interest may conflict with the interests of our other stockholders.

As discussed above, Santander, through SHUSA, has significant influence over us, including control over decisions that require the approval of stockholders, which could limit other stockholders’ ability to influence the outcome of key transactions, including a change of control.

SHUSA currently owns approximately 80.2% of our common stock and is a party to the shareholder agreement between us and certain of our shareholders (Shareholder Agreement). Accordingly, SHUSA has significant influence over us. Pursuant to the Shareholders Agreement, SHUSA has the right to nominate a majority of our directors so long as minimum share ownership thresholds are maintained. Further, because SHUSA owns a majority of our common stock, it has the power to elect our entire Board. Through our Board, and through functional reporting lines of SHUSA and our management, SHUSA controls our policies and operations, including, among other things, the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence of debt by us and the entry into extraordinary transactions.

In August 2020, the Company substantively exhausted the amount of shares the Company was permitted to repurchase under the exception SHUSA was granted to the Interim Policy. As a result of these repurchases, SHUSA now owns more than 80% of our common stock and therefore, the Company has been consolidated with SHUSA for tax filing and capital planning purposes, which provides SHUSA certain benefits. Among other things, tax consolidation (1) facilitates certain offsets of the Company's taxable income, (2) eliminates the double taxation of dividends from the Company, and (3) triggered a release into SHUSA's income of the deferred tax liability established with respect to its ownership of the Company. Tax consolidation also allows for the Company's net deferred tax liability to offset SHUSA's net deferred tax asset, which provides a regulatory capital benefit. In addition, SHUSA and Santander recognize a larger percentage of our net income.

Additionally, SHUSA may elect not to permit us to undertake certain actions or activities if SHUSA were to determine that such actions or activities could or would have negative regulatory implications to the Company, SHUSA, and/or Santander.

Further, the Shareholders Agreement provides the directors nominated by SHUSA with approval rights over certain specific material actions taken by us so long as minimum share ownership thresholds are maintained. These material actions include changes in material accounting policies, changes in material tax policies or positions and changes in our principal line of business.

The interests of SHUSA may conflict with the interests of our other stockholders. SHUSA’s influence and control over us may cause us to take actions that our other stockholders do not view as beneficial to them. In such circumstances, the market price of our common stock could be adversely affected. In addition, the existence of a controlling stockholder may have the effect of making it more difficult for a third party to acquire us, or may discourage a third party from seeking to acquire us.

Certain provisions of our amended and restated certificate of incorporation, and amended and restated bylaws, have anti-takeover effects, which could limit the price investors might be willing to pay in the future for our common stock. In addition, Delaware law may inhibit takeovers of us and could limit our ability to engage in certain strategic transactions our Board believes would be in the best interests of stockholders.

Certain provisions of our amended and restated certificate of incorporation, and amended and restated bylaws, could discourage unsolicited takeover proposals that stockholders might consider to be in their best interests. Among other things, our amended and restated certificate of incorporation, and amended and restated bylaws, include provisions that:

• do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

• limit the ability of our stockholders to nominate candidates for election to our Board;

• authorize the issuance of “blank check” preferred stock without any need for action by stockholders;

• limit the ability of stockholders to call special meetings of stockholders or to act by written consent in lieu of a meeting; and

• establish advance notice requirements for nominations for election to our Board or for proposing matters that may be acted on by stockholders at stockholder meetings.

The foregoing factors, as well as the significant common stock ownership by SHUSA, could impede a merger, takeover, or other business combination, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock.

In addition, Section 203 of the Delaware General Corporation Law (DGCL) generally affects the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations, or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an "interested stockholder. An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. We elected in our amended and restated certificate of incorporation not to be subject to Section 203 of the DGCL. However, our amended and restated certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that each of SHUSA and its successors and affiliates and certain of its direct transferees are not deemed to be “interested stockholders,” and, accordingly, are not subject to such restrictions as long as SHUSA and its affiliates own at least 10% of our outstanding shares of common stock.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements. Our stockholders do not have the same protections afforded to stockholders of companies that are subject to such requirements.

SHUSA owns a majority of the voting power of our outstanding common stock. As a result, we qualify as a “controlled company” within the meaning of the NYSE corporate governance standards. As a controlled company, we have elected to be exempt from certain NYSE corporate governance requirements, including the requirements:

• that our executive committee (which has the responsibilities under its charter of a nominating and governance committee) be composed entirely of independent directors; and

• that we have a compensation committee composed entirely of independent directors.

We have not elected to be exempt from certain other NYSE corporate governance requirements, including the requirements that a majority of our board consists of independent directors and we have a compensation committee with a written charter addressing the committee’s purpose and responsibilities. If we elect to be exempt from this or other NYSE corporate governance requirements, which we have done at times, our stockholders would not have the same protections afforded to stockholders of companies that are subject to these NYSE corporate governance requirements.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data.” This section of the Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons of 2020 to 2019. Discussions of 2018 items and year-to-year comparisons of 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 31, 2019. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Item 1A. “Risk Factors” and elsewhere in this Annual Report.

Background and Overview

The Company was formed in 2013 as a corporation in the state of Delaware and is the holding company for SC Illinois, a full-service, technology-driven consumer finance company focused on vehicle finance and third-party servicing. The Company is majority-owned (as of February 22, 2021, approximately 80.2%) by SHUSA, a wholly-owned subsidiary of Santander.

The Company is managed through a single reporting segment, Consumer Finance, which includes vehicle financial products and services, including retail installment contracts, vehicle leases, and Dealer Loans, as well as financial products and services related to recreational and marine vehicles, and other consumer finance products.

CCAP continues to be a focal point of the Company’s strategy. In 2019, the Company entered into an Amendment to the MPLFA with FCA, which modified the MPLFA to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. The Amendment also established an operating framework that was mutually beneficial

for both parties for the remainder of the contract. The Company’s average penetration rate under the MPLFA for the year ended December 31, 2020 was 34%, flat compared to the same period in 2019.

The Company has dedicated financing facilities in place for its CCAP business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the CCAP program. During the year ended December 31, 2020, the Company originated $14.2 billion in CCAP loans which represented 60% of total retail installment contract originations (unpaid principal balance), as well as $6.8 billion in CCAP leases. Additionally, substantially all of the leases originated by the Company during the year ended December 31, 2020 were under the MPLFA.

Economic and Business Environment

Unemployment rates increased to 6.7% as reported by the Bureau of Labor Statistics for December 31, 2020, the increase is caused by the loss of employment due primarily to the COVID-19 pandemic. The interest rate environment continues to be low with the federal funds rate in the range of 0.00% to 0.25% on December 31, 2020.

Refer to Part II, Item 7. " Management's Discussion and Analysis of Financial Conditions and Results of Operations - Recent Developments and Other Factors Affecting The Company’s Results of Operations " for additional details on the impact of the COVID-19 outbreak on Company's current financial and operating status, as well as its future operational and financial planning.

How the Company Assesses its Business Performance

Net income and the associated return on assets and equity, are the primary metrics by which the Company judges the performance of its business. Accordingly, the Company closely monitors the primary drivers of net income:

• Net financing income — The Company tracks the spread between the interest and finance charge income earned on assets and the interest expense incurred on liabilities, and continually monitors the components of its yield and cost of funds. The Company’s effective interest rate on borrowing is driven by various items including, but not limited to, credit quality of the collateral assigned, used/unused portion of facilities, and reference rate for the credit spread. These drivers, as well as external rate trends, including the swap curve, spot and forward rates are monitored.

• Net credit losses — The Company performs net credit loss analysis at the vintage level for retail installment contracts, loans and leases, and at the pool level for purchased portfolios-credit deteriorated, enabling it to pinpoint drivers of any unusual or unexpected trends. The Company also monitors its and industry-wide recovery rates. Additionally, because delinquencies are an early indicator of future net credit losses, the Company analyzes delinquency trends, adjusting for seasonality, to determine if the Company’s loans are performing in line with original estimations. The net credit loss analysis does not include considerations of the Company’s estimated ACL.

• Other income — The Company’s flow agreements and third-party servicing agreements have resulted in a large portfolio of assets serviced for others. These assets provide a steady stream of servicing income and may provide a gain or loss on sale. The Company monitors the size of the portfolio and average servicing fee rate and gain. Additionally, due to the classification of the Company’s personal lending portfolio as held for sale upon the decision to exit the personal lending line of business, adjustments to record this portfolio at the lower of cost or market are included in investment gains (losses), net, which is a component of other income (losses).

• Operating expenses — The Company assesses its operational efficiency using the cost-to-managed assets ratio. The Company performs extensive analysis to determine whether observed fluctuations in operating expense levels indicate a trend or are the nonrecurring impact of large projects. The operating expense analysis also includes a loan- and portfolio-level review of origination and servicing costs to assist the Company in assessing profitability by pool and vintage.

Because volume and portfolio size determine the magnitude of the impact of each of the above factors on the Company’s earnings, the Company also closely monitors origination and sales volume along with APR and discounts (including subvention and net of dealer participation).

Recent Developments and Other Factors Affecting The Company’s Results of Operations

Changes to Board of Directors and Executive Management Team

Effective as of December 7, 2020, the Board appointed Donald Smith, as Chief Technology Officer of the Company.

Effective as of January 1, 2021, the Board appointed Josh Baer, formerly Chief Risk Officer, as Head of Pricing and Strategy of the Company, and appointed RL Prasad as Chief Risk Officer of the Company.

Effective as of January 25, 2021, the Board appointed Leonard Coleman, Jr to the Board.

Outbreak of COVID-19

The current outbreak of a novel strain of coronavirus, or COVID-19, has materially impacted our business, and the continuance of this outbreak or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.

Due the unpredictable and changing nature of this outbreak and the resulting economic distress, it is not possible to determine with certainty the ultimate impact on our results of operations or whether other currently unanticipated consequences of the outbreak are reasonably likely to materially affect our results of operations; however, certain adverse effects have already occurred or are probable. The following sets forth our discussion of the impact of COVID-19 on Company's current financial and operating status, as well as its future operational and financial planning as of the date hereof:

• Impact on customers and loans and lease performance : The COVID-19 outbreak and the associated economic crisis have led to negative effects on our customers. Unlike the regional impact of natural disasters, such as hurricanes, the COVID-19 outbreak is impacting customers nationwide and is expected to have a materially more significant impact on the performance of our auto loan and auto lease portfolio than even the most severe historical natural disaster.

Similar to many other financial institutions, we have taken and will continue to take measures to mitigate our customers’ COVID-19 related economic challenges. We have experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted. These customer support programs, by their nature, to negatively impact our financial performance and other results of operations in the near term. Our business, financial condition and results of operations may be materially and adversely affected in the longer term if the COVID-19 outbreak leads us to continue to conduct such programs for a significant period of time, if the number of customers experiencing hardship related directly or indirectly to the outbreak of COVID-19 increases or if our customer support programs are not effective in mitigating the effects of the pandemic and the recession on our customers' financial situations. Given the unpredictable nature of this situation, the nature and extent of such effects cannot be predicted at this time, but such effects could be materially adverse effects to our business, financial condition and results of operations.

Further, government or regulatory authorities could also enact laws, regulations, executive orders or other guidance that allow customers to forgo making scheduled payments for some period of time, require modifications to receivables (e.g., waiving accrued interest), preclude creditors from exercising certain rights or taking certain actions with respect to collateral, including repossession or liquidation of the financed vehicles, or mandate limited operations or temporary closures of the Company or our vendors as “non-essential businesses” or otherwise. Such actions by government or regulatory authorities could have materially negative effects on our business, financial condition and results of operations.

• Impact on originations : Since COVID-19 outbreak, the Company has partnered with FCA to launch new incentive programs, including, 90-day first payment deferrals and 0% APR for 84 months on select 2019/2020 FCA models. Most dealers are open today and operating at full capacity. However, some dealers are operating in a modified capacity based on state requirements and/or COVID related employee concerns. Third party sources are reporting a new car SAAR rate that is approximately 95% of pre-COVID expectations. While an economic downturn associated with the pandemic will impact sales, most dealers have developed business models that will allow them to continue operation in some capacity.

• Impact on Debt and Liquidity : We rely upon four primary sources to fund our operations, including private financing, warehouse lines of credit, the asset-backed securitization market, and support from Santander. As international trade and business activity has slowed and supply chains have been disrupted, global credit and financial markets have recently experienced, and may continue to experience, significant disruption and volatility. During the year ended

December 31, 2020, financial markets experienced significant declines and volatility, and such market conditions may continue in the U.S. economy. Under these circumstances, we may experience some or all of the risks related to market volatility and recessionary conditions described in the Risk Factors section of our Form 10-K. These include reduced demand for our products and services and reduced access to capital markets funding. These risks could have materially adverse impacts on our liquidity, financial condition, results of operations and cash flows.

Governmental and regulatory authorities have recently implemented fiscal and monetary policies and initiatives to mitigate the effects of the outbreak on the economy and individual businesses and households, such as the reduction of the Federal Reserve’s benchmark interest rate to near zero in March 2020. Further, the FRB established the Term Asset Backed Securities Loan Facility ("TALF") to support the flow of credit to consumers and businesses, including the investment in certain eligible ABS bonds. Given the current state of the capital markets and the recent tightening in ABS credit spreads, the Company did not utilize TALF during 2020, but the Company may utilize TALF, if it becomes necessary to do so. These governmental and regulatory actions may not be successful in the long-term mitigating the adverse economic effects of COVID-19 and could affect our liquidity, access to funding and net interest income and reduce our profitability. Sustained adverse economic effects from the outbreak may also result in downgrades in our credit ratings or adversely affect the interest rate environment. If our access to funding is reduced or if our costs to obtain such funding significantly increases, our business, financial condition and results of operations could be materially and adversely affected.

In addition, the Company’s ability to make payments on the notes could be adversely affected if its customers were unable to make timely payments or if the Company elected to, or was required to, implement forbearance programs in connection with customers suffering a hardship (including hardships related to the outbreak of COVID-19).

The capital markets appear to have recovered in third quarter compared to the first half of the year, however, due to the rapidly evolving nature of the COVID-19 outbreak, it is not possible to predict whether unanticipated consequences of the outbreak are reasonably likely to affect materially our liquidity, access to funding and capital resources in the future.

• Impact on impairment of goodwill, indefinite-lived and long-lived assets : In accordance with accounting policy, the Company has analyzed the impact of COVID-19 on its financial statements, including the potential for impairment. The analysis did not support any impairment of these assets, including Goodwill, Leased Vehicles and other non-financial assets such as upfront fee and other Intangibles.

• Impact on communities : The Company is committed to supporting our communities impacted by the COVID-19 outbreak, and the Company's non-profit foundation has begun responding to the COVID-19 crisis with $3.0 million in donations to a select group of organizations addressing community issues.

Critical Accounting Estimates

Accounting policies are integral to understanding the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make certain judgments and assumptions, on the basis of information available at the time of the financial statements, in determining accounting estimates used in the preparation of these statements. The Company’s significant accounting policies are described in Note 1 - “Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices” in the accompanying consolidated financial statements; critical accounting estimates are described in this section. An accounting estimate is considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from the Company’s judgments and assumptions, then it may have an adverse impact on the results of operations, financial condition, and cash flows. The Company’s management has discussed the development, selection, and disclosure of these critical accounting estimates with the Audit Committee of the Board, and the Audit Committee has reviewed the Company’s disclosure relating to these estimates.

Credit Loss Allowance

The Company maintains an ACL for the Company’s held-for-investment portfolio, excluding those loans measured at fair value in accordance with applicable accounting standards.

The allowance for expected credit losses on retail installment contracts is measured based on a current expected loss model, which means that it is not necessary for a loss event to occur before a credit loss is recognized. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. Management's evaluation takes into consideration the risks in the portfolio, past loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.

The Company uses a statistical methodology based on an ECL approach that focuses on forecasting the ECL components (i.e., probability of default, payoff, loss given default and exposure at default) on a loan level basis to estimate the expected future life time losses. The individual loan balances used in the models are measured on an amortized cost basis.

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains a qualitative reserve as a component of the ACL to recognize the existence of these exposures. Imprecisions include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in deriving the quantitative component of the allowance, as well as potential variability in estimates.

The qualitative adjustment is also established in consideration of several factors such as the interpretation of economic trends, changes in the nature and volume of our loan portfolio, trends in delinquency and collateral values, and concentration risks. This analysis is conducted at least quarterly, and the Company revises the qualitative component of the allowance when necessary in order to address improving or deteriorating credit quality trends or specific risks associated with loan pool classification, not otherwise captured in the quantitative models.

The Company generally uses a third-party vendor's consensus baseline macroeconomic scenario for the quantitative estimate and additional positive and negative macroeconomic scenarios to make a qualitative adjustment for macroeconomic uncertainty, and considers adjustments to macroeconomic inputs and outputs based on market volatility. The baseline scenario was based on the latest consensus forecasts available which showed an improvement in key variables in this quarter, including a sharp decrease in unemployment rates (which are a key driver to losses). Using the weighted-average of our economic forecast scenarios, we estimated at December 31, 2020 that unemployment rate is expected to be to be approximately 7% at the end of 2021, with the labor market continuing to recover in 2022. While the economy has seen significant recovery in recent months, there is still considerable uncertainty regarding overall lifetime loss estimates. The scenarios used are periodically updated over a reasonable and supportable time horizon with weightings assigned by management and approved through established committee governance.

Management reviews, updates, and validates its process and loss assumptions on a periodic basis. This process involves an analysis of data integrity, review of loss and credit trends, a retrospective evaluation of actual loss information to loss forecasts, and other analyses.

Valuation of Automotive Lease Assets and Residuals

The Company has significant investments in vehicles in the Company’s operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. At contract inception, the Company determines the projected residual value based on an internal evaluation of the expected future value. This evaluation is based on a proprietary model using internally-generated data that is compared against third party, independent data for reasonableness. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a finance charge. However, since the customer is not obligated to purchase the vehicle at the end of the contract, the Company is exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of lease assets.

To account for residual risk, the Company depreciates automotive operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Periodically, the Company revises the projected value of the lease vehicle at termination based on current market conditions, and other relevant data points, and adjusts depreciation expense appropriately over the remaining term of the lease.

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). 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 2020, 2019 or 2018.

The Company’s depreciation methodology for operating lease assets considers management’s expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automotive lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) the Company’s remarketing abilities, and (4) automotive manufacturer vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals. Expected residual values include estimates of payments from automotive manufacturers related to residual support and risk-sharing agreements, if any. To the extent an automotive manufacturer is not able to fully honor its obligation relative to these agreements, the Company’s depreciation expense would be negatively impacted.

Provision for Income Taxes

In determining taxable income, the Company must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

The Company’s largest deferred tax liability relates to leased vehicles. This liability is primarily due to the acceleration of depreciation for tax purposes and the deferral of tax gains through like-kind exchange transactions in prior years. The Tax Cuts and Jobs Act permanently eliminated the ability to exchange personal property after January 1, 2018 which resulted in the like-kind exchange program being discontinued in 2018.

Because the volume of the Company’s loan sales exceeds the “negligible sales” exception under section 475 of the Internal Revenue Code, the Company is classified as a dealer in securities for tax purposes. Accordingly, the Company must report its finance receivables and loans at fair value in the Company’s tax returns. Changes in the fair value of Company’s receivables and loans portfolios have a significant impact on the size of deferred tax assets and liabilities. Estimated fair value is dependent on key assumptions including prepayment rates, expected recovery rates, charge-off rates and timing, and discount rates.

In evaluating the Company’s ability to recover deferred tax assets, the Company considers all available positive and negative evidence including past operating results and the Company’s forecast of future taxable income. In estimating future taxable income, the Company develops assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the Company’s underlying businesses.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company’s results of operations, financial condition or cash flows.

In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in the United States (including Puerto Rico). The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on estimates of whether, and the extent to which, additional taxes will be due in accordance with the authoritative guidance regarding the accounting for uncertain tax positions. The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. If the Company’s estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.

For additional information regarding the Company’s provision for income taxes, refer to Note 13 - “Income Taxes” in the accompanying financial statements.

Fair Value of Financial Instruments

The Company uses fair value measurements to determine fair value adjustments to certain instruments and fair value disclosures. Refer to Note 11 - “Fair Value of Financial Instruments” in the accompanying financial statements for a description of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. The Company follows the fair value hierarchy set forth in Note 11 - “Fair Value of Financial Instruments” in the accompanying financial statements in order to prioritize the inputs utilized to measure fair value. The Company reviews and modifies, as necessary, the fair value hierarchy classifications on a quarterly basis. As such, there may be reclassifications between hierarchy levels due to changes in inputs to the valuation techniques used to measure fair value.

The Company has numerous internal controls in place to ensure the appropriateness of fair value measurements, including controls over the inputs into and the outputs from the fair value measurements. Certain valuations will also be benchmarked to market indices when appropriate and available.

Considerable judgment is used in forming conclusions from market observable data used to estimate the Company’s Level 2 fair value measurements and in estimating inputs to the Company’s internal valuation models used to estimate Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, recovery rates and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, the Company’s estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

Recent Accounting Pronouncements

Information concerning the Company’s implementation and impact of new accounting standards issued by the Financial Accounting Standards Board (FASB) is discussed in Note 1 - “Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices” in the accompanying consolidated financial statements under “Recent Accounting Pronouncements.”

Market Data

Market data used in this Annual Report on Form 10-K has been obtained from independent industry sources and publications, such as the Federal Reserve Bank of New York; the Federal Reserve Bank of Philadelphia; the Federal Reserve Board; The Conference Board; the CFPB; Equifax Inc.; Experian Automotive; FCA; Fair Isaac Corporation; FICO® Banking Analytics Blog; Polk Automotive; the United States Department of Commerce: Bureau of Economic Analysis; J.D. Power; and Ward’s Automotive Reports. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this Annual Report on Form 10-K.

For purposes of this Annual Report on Form 10-K, the Company categorizes the prime segment as borrowers with FICO® scores of 640 and above and the nonprime segment as borrowers with FICO® scores below 640.

Volume

The Company’s originations of loans and leases, including revolving loans, average APR, and dealer discount (net of dealer participation) for the year ended December 31, 2020, 2019 and 2018 were as follows:

For the Year Ended December 31,

(Dollar amounts in thousands)

Retained Originations

Retail installment contracts

Average APR

Average FICO® (a)

Discount/(premium)

Personal loans (b)

Average APR

Leased vehicles

Finance lease

Total originations retained

Sold Originations

Retail installment contracts

Average APR

Average FICO® (c)

Total Originations Sold

Total SC Originations

Total originations (excluding SBNA Originations Program) (d)

(a) Unpaid principal balance excluded from the weighted average FICO score is $1.9 billion, $1.8 billion and $1.9 billion as the borrowers on these loans did not have FICO scores at origination and of these amounts, $539 million and $582 million and $76 million, respectively, were commercial loans for the year ended December 31, 2020, 2019 and 2018, respectively.

(b)    Included in the total origination volume is $294 million and $270 million and $304 million for the year ended December 31, 2020, 2019 and 2018, respectively, related to newly opened accounts.

(c)    Unpaid principal balance excluded from the weighted average FICO score is $80 million, zero and $143 million for the year ended December 31, 2020, 2019 and 2018, respectively, as the borrowers on these loans did not have FICO scores at origination. of these amounts, zero and zero and $76 million, respectively, were commercial loans for the year ended December 31, 2020, 2019 and 2018, respectively.

(d)     Total originations excludes finance receivables (UPB) of zero, $1.1 billion and zero purchased from third party lenders during the years ended year ended December 31, 2020, 2019 and 2018, respectively.

Total auto originations (excluding SBNA Origination Program) increased $0.8 billion, or 3.2%, from the year ended December 31, 2019 to 2020. The Company's initiatives to improve our pricing, as well as, our dealer and customer experience have increased our competitive position in the market. The Company continues to focus on optimizing the loan quality of its portfolio with an appropriate balance of volume and risk. CCAP volume and penetration rates are influenced by strategies implemented by FCA and the Company, including product mix and incentives.

Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail auto loans, primarily from FCA dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA’s behalf. During the year ended December 31, 2020 and 2019 the Company facilitated the purchase of $5.4 billion and $7.0 billion of retail installment contacts, respectively.

The Company’s originations of retail installment contracts and leases by vehicle type during the year ended December 31, 2020 2019 and 2018 were as follows:

For the Year Ended December 31,

(Dollar amounts in thousands)

Retail installment contracts

Car

Truck and utility

Van and other (a)

Leased vehicles

Car

Truck and utility

Van and other (a)

Total originations by vehicle type

Car

Truck and utility

Van and other (a)

(a) Other primarily consists of commercial vehicles.

The Company’s portfolio of retail installment contracts held for investment and leases by vehicle type as of December 31, 2020 and 2019 are as follows:

December 31, 2020

December 31, 2019

(Dollar amounts in thousands)

Retail installment contracts

Car

Truck and utility

Van and other (a)

Leased vehicles

Car

Truck and utility

Van and other (a)

Total by vehicle type

Car

Truck and utility

Van and other (a)

(a) Other primarily consists of commercial vehicles.

The Company's asset sales for the year ended December 31, 2020, 2019 and 2018 were as follows:

For the Year Ended December 31,

(Dollar amounts in thousands)

Retail installment contracts

Average APR

Average FICO®

The unpaid principal balance, average APR, and remaining unaccreted net discount of the Company’s held for investment portfolio as of December 31, 2020 and 2019 are as follows:

December 31, 2020

December 31, 2019

(Dollar amounts in thousands)

Retail installment contracts

Average APR

Discount

Receivables from dealers

Average APR

Leased vehicles

Finance leases

The Company records interest income from retail installment contracts and receivables from dealers in accordance with the terms of the loans, generally discontinuing and reversing accrued income once a loan becomes more than 60 days past due, except in the case of revolving personal loans, for which the Company continues to accrue interest until charge-off, in the month in which the loan becomes 180 days past due, and receivables from dealers, for which the Company continues to accrue interest until the loan becomes more than 90 days past due.

The Company generally does not acquire receivables from dealers at a discount. The Company amortizes discounts, subvention payments from manufacturers, and origination costs as adjustments to income from retail installment contracts using the effective yield method. The Company estimates future principal prepayments specific to pools of homogeneous loans 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 considered in the prepayment rate, and 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 9.8% to 16.2% as of December 31, 2020, and 5.1% to 11.0% as of December 31, 2019. The Company amortizes the discount, if applicable, on revolving personal loans straight-line over the estimated period over which the receivables are expected to be outstanding.

Historically, the Company’s primary means of acquiring retail installment contracts has been through individual acquisitions immediately after origination by a dealer. The Company also periodically purchases pools of receivables and had significant volumes of these purchases during the credit crisis. During the year ended December 31, 2020 and 2019, the Company purchased a pool of receivables from a third party lender for zero and $1.09 billion, respectively, of which the Company elected the fair value option for zero and $22 million, respectively, deemed to be non-performing since it was determined that not all contractually required payments would be collected.

In addition, during the year ended December 31, 2020, 2019 and 2018 the Company did recognize certain retail installment contracts with an unpaid principal balance of $76,878, $74,718 and $213,973, respectively, held by non-consolidated securitization Trusts under optional clean-up calls. Following the initial recognition of these loans at fair value, the performing loans in the portfolio will be carried at amortized cost, net of ACL. The Company elected the fair value option for all non-performing loans acquired (more than 60 days delinquent as of re-recognition date), for which it was probable that not all contractually required payments would be collected. For the Company’s existing purchased receivables portfolios - credit deteriorated, which were acquired at a discount partially attributable to credit deterioration since origination, the Company estimates the expected yield on each portfolio at acquisition and records monthly accretion income based on this expectation. The Company periodically re-evaluates performance expectations and may increase the accretion rate if a pool is performing better than expected. If a pool is performing worse than expected, the Company is required to continue to record accretion income at the previously established rate and to record impairment to account for the worsening performance.

The Company classifies most of its vehicle leases as operating leases. The Company records the net capitalized cost of each lease as an asset, which is depreciated straight-line over the contractual term of the lease to the expected residual value. The Company records lease payments due from customers as income until and unless a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued and reversed. The Company resumes and reinstates the accrual of revenue if a delinquent account subsequently becomes 60 days or less past due. The Company amortizes subvention payments from the manufacturer, down payments from the customer, and initial direct costs incurred in connection with originating the lease straight-line over the contractual term of the lease.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Interest on Finance Receivables and Loans

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Income from retail installment contracts

Income from purchased receivables portfolios - credit deteriorated

Income from receivables from dealers

Income from personal loans

Total interest on finance receivables and loans

Income from retail installment contracts  increased $102 million or 2% from 2019 to 2020 primarily due to increase in average outstanding balance of company's portfolio and new originations.

Income from personal loans decreased $24 million or 7%, from 2019 to 2020 primarily du e to 6% decrease in average outstanding balance of the Company's portfolio, respectively.

Leased Vehicle Income and Expense

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Leased vehicle income

Leased vehicle expense

Leased vehicle income, net

Le ased vehicle income, net decreased $29 million or 3% in 2020 compared to 2019 due to an increase in depreciation on a larger lease portfolio and a decrease in liquidated units. Thro ugh the MPLFA, the Company receives manufacturer incentives on new leases originated under the program in the form of lease subvention payments, which are amortized over the term of the lease and reduce depreciation expense within leased vehicle expense.

Interest Expense

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Interest expense on notes payable

Interest expense on derivatives

Total interest expense

Total Interest expense decreased $127 million or 10% from 2019 to 2020, primarily due to a lower interest rate environment partially offset by the impact of declined forward curves on cash flow hedges.

Credit Loss Expense

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Credit loss expense

Credit loss expense increased $271 million or 13% from 2019 to 2020, primarily driven by the adoption of the CECL standard in 2020, which replaced the incurred loss impairment framework with one that reflects expected credit losses over the full expected life of financial assets. In addition, the Company added a significant amount of additional reserve to address credit risk associated with the COVID-19 outbreak and associated economic recession during the first and second quarter of 2020.

Profit Sharing

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Profit sharing

Profit sharing expense consists of revenue sharing related to the MPLFA and profit sharing on personal loans originated pursuant to the agreements with Bluestem. Profit sharing expense increased from 2019 to 2020 primarily due to an increase in lease portfolio and average payments.

Other Income

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Investment losses, net

Servicing fee income

Fees, commissions, and other

Total other income

Average serviced for others portfolio

Servicing fee income decreased $17 million fr om 2019 to 2020 due t o the runoff of serviced portfolio with higher servicing fee rates replaced with new loans with lower servicing fee rates. The Company records servicing fee income on loans that it services but does not own and does not report on its balance sheet. The serviced for others portfolio as of December 31, 2020 and 2019 was as follows:

December 31,

(Dollar amounts in thousands)

SBNA and Santander retail installment contracts

SBNA leases

Total serviced for related parties

CCAP securitizations

SCART securitizations

Other third parties

Total serviced for third parties

Total serviced for others portfolio

Fees, commissions, and other , primarily includes late fees, miscellaneous, and other income. This income decreased $20 million or (6)% from 2019 to 2020, due to lower originations from SBNA and decrease in wear and tear income of $10 million due to reserve recorded for anticipated customer refunds.

Total Operating Expenses

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Compensation expense

Repossession expense

Other operating costs

Total operating expenses

Compensation expe nses increased $42 million or 8% from 2019 to 2020, primarily due to an increase of 401 employees, and increase in claims reserve, incurred but not reported, due to higher prescription and medical claims related to additional employee count.

Repossession expense decreased $102 million or 39% from 2019 to 2020, primarily due to the lower volume of involuntary repossessions nationwide as a result of the COVID-19 outbreak.

Income Tax Expense

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Income tax expense

Income before income taxes

Effective tax rate

The effective tax rate decreased from 26.6% in 2019 to 24.7% in 2020, primarily due to higher increases in uncertain tax positions in the prior year and lower state return to provision true-ups in the current year.

Other Comprehensive Income (Loss)

For the Year Ended

December 31,

Increase (Decrease)

Amount

Percent

(Dollar amounts in thousands)

Change in unrealized gains (losses) on cash flow hedges and available-for-sale securities, net of tax

The change in unrealized gains (losses) for 2020 as compared to 2019, was primarily driven by a decrease in cash flow hedge portfolio related to mark-to-market valuation due to decreasing interest rates, as shown in Note 10 “ Derivative Financial Instruments ”.

Credit Quality

Loans and Other Finance Receivables

Allowance for Credit losses

Non-prime loans comprise 76% of the Company’s portfolio as of December 31, 2020. The Company records an ACL at a level considered adequate to cover current expected credit losses in the Company’s retail installment contracts and other loans and receivables held for investment, based upon a holistic assessment including both quantitative and qualitative considerations. Refer to Note 2 - "Finance Receivables" and Note 3 - "Credit Loss Allowance and Credit Quality " to the accompanying consolidated financial statements for the details on the Company’s held for investment portfolio of retail installment contracts as of December 31, 2020 and 2019.

Credit risk profile

A summary of the credit risk profile of the Company’s retail installment contracts held for investment, by FICO® score, number of trade lines (represents number of approved credit accounts reported to credit reporting agencies), and length of credit

history, each as determined at origination, as of December 31, 2020 and 2019 was as follows (dollar amounts in billions, totals may not foot due to rounding):

December 31, 2020

Trade Lines

Total

FICO

Months History

No-FICO (a)

Total (c)

December 31, 2019 (b)

Trade Lines

Total

FICO

Months History

No-FICO (a)

Total

(a) Includes commercial loans

(b) The information as of December 31, 2019 includes balances based on UPB. Difference between amortized cost and UPB was not material.

(c)The amount of accrued interest excluded from the disclosed amortized cost as of December 31, 2020 is $416 million .

Delinquencies

The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date.

In each case, the period of delinquency is based on the number of days payments are contractually past due. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year, and economic factors. Historically, the Company’s delinquencies have been highest in the period from November through January due to consumers’ holiday spending. For the year ended December 31, 2020, delinquency rates have been positively impacted (lower) due to the historic volume of deferrals granted to borrowers impacted by COVID-19 and benefits of government stimulus.

Refer to Note 3 - "Credit Loss Allowance and Credit Quality" to the accompanying consolidated financial statements for the details on the retail installment contracts held for investment that were placed on nonaccrual status, as of December 31, 2020 and 2019.

Credit Loss Experience

The following is a summary of net losses and repossession activity on retail installment contracts held for investment for the year ended December 31, 2020 and 2019.

For the Year Ended December 31,

(Dollar amounts in thousands)

Principal outstanding at period end

Average principal outstanding during the period

Number of receivables outstanding at period end

Average number of receivables outstanding during the period

Number of repossessions (a)

Number of repossessions as a percent of average number of receivables outstanding

Net losses

Net losses as a percent of average principal amount outstanding (b)

(a) Repossessions are net of redemptions. The number of repossessions includes repossessions from the outstanding portfolio and from accounts already charged off. The Company temporarily suspended involuntary repossession activities nationwide during the onset of COVID-19 and restarted these activities during Q3 2020.

(b) Decrease is due to reduction in number of repossessions (refer to note (a) above), and increase in number of deferrals (explained in detail under " Deferrals and Troubled Debt Restructurings " below) as it relates to COVID-19.

There were no charge-offs on the Company’s receivables from dealers for the year ended December 31, 2020 and 2019. Net charge-offs on the finance lease receivables portfolio, totaled $3,913 and $769 for the year ended December 31, 2020 and 2019, respectively.

Deferrals and Troubled Debt Restructurings

In accordance with the Company’s policies and guidelines, the Company may offer extensions (deferrals) to customers on its retail installment contracts, whereby the customer is allowed to defer a maximum of three payments per event to the end of the loan. Prior to March 2020, the Company’s policies and guidelines limited the frequency of each new deferral to one deferral every six months, regardless of the length of any prior deferral. Further, the maximum number of lifetime months extended for all automobile retail installment contracts was eight, while some marine and recreational vehicle contracts had a maximum of twelve months extended to reflect their longer term. Additionally, the Company generally limited the granting of deferrals on new accounts until a requisite number of months have passed since origination. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.

However, in March 2020, the Company began actively working with its borrowers impacted by COVID-19 and provided loan modification programs to mitigate the adverse effects of COVID-19. These programs temporarily revised the practices noted above by 1) increasing the maximum number of months extended, 2) allowing more than one deferral every six months and 3) removing the requirement that a requisite number of months have passed since origination. The Company's predominant program offering is a two-month deferral of payments to the end of the loan term and waiver of late charges.

Since the implementation of the program in March 2020, we have experienced a sharp increase in requests for extensions related to COVID-19 and over 1 million loan extensions have been granted. As of December 31, 2020, approximately one third (or $11 billion in balances) of our customers have received a COVID-19 deferral. The following table provides a summary of loan balances with active payment deferrals as of the end of each reporting period:

December 31, 2020

September 30, 2020

June 30, 2020

(Dollar amounts in thousands)

Loan balance of active deferrals (a)

% of portfolio

Loan balance of active deferrals (a)

% of portfolio

Loan balance of active deferrals (a)

% of portfolio

Retail installment contracts

(a) Excludes deferrals with payments due in December 31, 2020

Through December 31, 2020, over 697,000 unique accounts have received COVID-19 deferrals. Of these accounts, 79% have exited deferral status, 8% remain in active deferral, 8% have paid-off, and 5% have charged off. Of the loans that have exited deferral status, 80% are less than 30 days past due and 98% of these accounts have made at least one payment since their first COVID-19 extension.

The following is a summary of all deferrals (amortized cost) on the Company’s retail installment contracts held for investment as of the dates indicated:

December 31, 2020

December 31, 2019 (a)

(Dollar amounts in thousands)

Never deferred

Deferred once

Deferred twice

Deferred 3 - 4 times

Deferred greater than 4 times

Total (b)

(a) The information as of December 31, 2019 is based on UPB. Difference between amortized cost and UPB was not material.

(b) The amount of accrued interest excluded from the disclosed amortized cost as of December 31, 2020 is $416 million .

The historic volume of deferrals granted in response to COVID-19 impacts have caused the percentage of retail installment contracts that have never been deferred to decrease significantly year over year, and the percentage of retail installment contracts deferred more than four times to increase significantly.

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 other 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. If a customer receives two or more deferrals over the life of the loan, the loan would generally advance to a TDR designation.

However, in March 2020, the federal bank regulatory agencies issued an “ Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus .” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19 and concludes that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were impacted by COVID-19 and who were less than 30 days past due as of the implementation date of a relief program are not TDRs. The Company applied this guidance to deferrals executed in response to COVID-19 and did not designate borrowers who were less than 30 days past due at the time of the COVID-19 extension program as TDR’s, even if they would have otherwise qualified. Upon exceeding six months of COVID-19 extensions, borrowers are designated as a TDR. This guidance (or exception) prevented approximately $3.5 billion in retail installment contract balances from being TDR designated as of December 31, 2020. Approximately 34% of all accounts that have received a COVID-19 deferral and are active as of December 31, 2020 are classified as TDR's.

The Company evaluates the results of deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, expected life of the loan and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the Company’s ACL are also impacted.

The Company also may agree, or be required by operation of law or by a bankruptcy court, to grant a modification involving one or a combination of the following: a reduction in interest rate, a reduction in loan principal balance, a temporary reduction of monthly payment, or an extension of the maturity date. The servicer of the Company’s revolving personal loans also may grant modifications in the form of principal or interest rate reductions or payment plans. Similar to deferrals, the Company believes modifications are an effective portfolio management technique. Not all modifications are classified as TDRs as the loan may not meet the scope of the applicable guidance or the modification may have been granted for a reason other than the borrower’s financial difficulties.

A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. TDRs are generally placed on nonaccrual status when the account becomes past due more than 60 days. For loans on nonaccrual status,

interest income is recognized on a cash basis and the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due.

The following is a summary of the amortized cost (including accrued interest) balance as of December 31, 2020 and 2019 of loans that have received these modifications and concessions;

December 31, 2020

December 31, 2019 (a)

Retail Installment Contracts

(Dollar amounts in thousands)

Temporary reduction of monthly payment (b)

Bankruptcy-related accounts

Extension of maturity date

Interest rate reduction

Max buy rate and fair lending (c)

Other (d)

Total modified loans

(a) The table includes balances based on UPB. Difference between amortized cost and UPB was not material.

(b) Reduces a customer’s payment for a temporary time period (no more than six months)

(c) Max buy rate modifications comprise of loans modified by the Company to adjust the interest rate quoted in a dealer-arranged financing. 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 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.

(d) Includes various other types of modifications and concessions, such as hardship modifications that are considered a TDR event.

Refer to Note 3 - "Credit Loss Allowance and Credit Quality" to these accompanying consolidated financial statements for the details on the Company’s amortized cost (including accrued interest) in TDRs and a summary of delinquent TDRs, as of December 31, 2020 and 2019.

The following table shows the components of the changes in the amortized cost (including accrued interest) in retail installment contract TDRs for the year ended December 31, 2020 and 2019:

For the Year Ended December 31,

Balance — beginning of period

New TDRs

Charge-offs

Paydowns (a)

Others

Balance — end of period (b)

(a) Includes net discount accreted in interest income for the period.

(b) excluding collateral-dependent bankruptcy TDRs

Liquidity Management, Funding and Capital Resources

Source of Funding

The Company requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. The Company funds its operations through its lending relationships with 13 third-party banks, Santander and SHUSA, and through securitizations in the ABS market and flow agreements. The Company seeks to issue debt that appropriately matches the cash flows of the assets that it originates. The Company has more than $5.6 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the year ended December 31, 2020, the Company completed on-balance sheet funding transactions totaling approximately $14.1 billion, including:

• private amortizing lease facilities for approximately $4.0 billion;

• securitizations on the Company’s SDART platform for approximately $5.7 billion;

• securitizations on the Company's DRIVE, deeper subprime platform, for approximately $2.0 billion;

• lease securitizations on our SRT platform for approximately $2.3 billion; and

• issuance of a retained bond on the Company's SRT platform for approximately $54.1 million

The Company also completed approximatel y $1.1 billion in asset sales to third parties.

Refer to Note 8 - "Debt" to the accompanying consolidated financial statements for the details on the Company’s total debt.

Credit Facilities

Third-party Revolving Credit Facilities

Warehouse Lines

The Company uses warehouse facilities to fund its originations. Each facility specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. The Company’s warehouse facilities generally are backed by auto retail installment contracts or auto leases. These facilities generally have one- or two-year commitments, staggered maturities and floating interest rates. The Company maintains daily and long term funding forecasts for originations, acquisitions, and other large outflows such as tax payments to balance the desire to minimize funding costs with liquidity needs.

The Company’s warehouse facilities generally have net spread, delinquency, and net loss ratio limits. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain warehouse facilities, delinquency and net loss ratios are calculated with respect to the serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased overcollateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurs under one of these agreements, the lenders could elect to declare all amounts outstanding under the impacted agreement to be immediately due and payable, enforce their interests against collateral pledged under the agreement, restrict the Company’s ability to obtain additional borrowings under the agreement, and/or remove it as servicer. The Company has never had a warehouse facility terminated due to failure to comply with any ratio or a failure to meet any covenant. A default under one of these agreements can be enforced only with respect to the impacted facility.

The Company has one credit facility with eight banks providing an aggregate commitment of $3.5 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Finance lease financing. As of December 31, 2020 there was an outstanding balance of approximately $0.4 billion on this facility in aggregate. The facility requires reduced Advance Rates in the event of delinquency, credit loss, or residual loss ratios, as well as other metrics exceeding specified thresholds.

The Company has eight credit facilities with eleven banks providing an aggregate commitment of $8.3 billion for the exclusive use of providing short-term liquidity needs to support Core and CCAP Loan financing. As of December 31, 2020 there was an outstanding balance of approximately $3.6 billion on these facilities in aggregate. These facilities reduced Advance Rates in the event of delinquency, credit loss, as well as various other metrics exceeding specific thresholds.

Repurchase Agreements

The Company obtains financing through investment management or repurchase agreements whereby the Company pledges retained subordinate bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to one year. As of December 31, 2020 there was an outstanding balance of $168 million under these repurchase agreements.

Lines of Credit with Santander and Related Subsidiaries

Santander and certain of its subsidiaries, such as SHUSA, historically have provided, and continue to provide, the Company with significant funding support in the form of committed credit facilities. The Company’s debt with these affiliated entities consisted of the following:

As of December 31, 2020 (amounts in thousands)

Counterparty

Utilized Balance

Committed Amount

Average Outstanding Balance

Maximum Outstanding Balance

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

SHUSA

Promissory Note

Santander

Promissory Note

Santander

Line of Credit

SHUSA

Line of Credit

SHUSA

SHUSA provides the Compa ny with $0.5 billion of committed revolving credit and $2.5 billion of contingent liquidity that can be drawn on an unsecured basis. SHUSA also provides the Company with $6.8 billion of term promissory notes with maturities ranging from March 2021 to May 2025. Santander provides the Company with $4 billion of unsecured promissory notes with maturities ranging from June 2022 and September 2022.

Secured Structured Financings

The Company’s secured structured financings primarily consist of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act and privately issues amortizing notes. The Company has on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximat ely $26 billion.

The Company obtains long-term funding for its receivables through securitization in the ABS market. ABS provides an attractive source of funding due to the cost efficiency of the market, a large and deep investor base, and tenors that appropriately match the cash flows of the debt to the cash flows of the underlying assets. The term structure of a securitization generally locks in fixed rate funding for the life of the underlying fixed rate assets, and the matching amortization of the assets and liabilities provides committed funding for the collateralized loans throughout their terms. In certain cases, SC may choose to issue floating rate securities based on market conditions.

The Company executes each securitization transaction by selling receivables to securitization Trusts that issue ABS to investors. To attain specified credit ratings for each class of bonds, these securitization transactions have credit enhancement requirements in the form of subordination, restricted cash accounts, excess cash flow, and overcollateralization, whereby more receivables are transferred to the Trusts than the amount of ABS issued by the Trusts.

Excess cash flows result from the difference between the finance and interest income received from the obligors on the receivables and the interest paid to the ABS investors, net of credit losses and expenses. Initially, excess cash flows generated by the Trusts are used to pay down outstanding debt in the Trusts, increasing overcollateralization until a targeted percentage has been reached. Once the targeted overcollateralization is reached it is maintained and excess cash flows generated by the Trusts are released to the holder of the residual (generally the Company) as distributions from the Trusts. The Company also receives monthly servicing fees as servicer for the Trusts. The Company’s securitizations may require an increase in credit

enhancement levels if Cumulative Net Losses, as defined in the documents in certain ABS transactions, exceed a specified percentage of the pool balance. For outstanding securitizations, as of December 31, 2020, none have Cumulative Net Loss percentages above their respective limits.

The Company’s on-balance sheet securitization transactions utilize bankruptcy-remote special purpose entities, which are considered VIEs and meet the requirements to be consolidated in the Company’s financial statements. Following a securitization, the finance receivables and the notes payable related to the securitized retail installment contracts remain on the consolidated balance sheets. The Company recognizes finance and interest income as well as fee income on the collateralized retail installment contracts and interest expense on the ABS issued. The Company also records a provision for credit losses to cover the estimate of inherent credit losses on the retail installment contracts. While these Trusts are consolidated in the Company’s financial statements, these Trusts are separate legal entities. Thus, the finance receivables and other assets sold to these Trusts are legally owned by these Trusts, are available only to satisfy the notes payable related to the securitized retail installment contracts, and are not available to the Company’s creditors or its other subsidiaries.

The Company’s securitizations generally have several classes of notes, with principal paid sequentially based on seniority and any excess spread, once targeted levels are reached, distributed to the residual holder. The company, at times when economically favorable, retains the lowest bond class and the residual, except in the case of off-balance sheet securitizations, which are described further below. The Company uses the proceeds from securitization transactions to repay borrowings outstanding under its credit facilities, originate and acquire loans and leases, and for general corporate purposes. The Company generally exercises clean-up call options on its securitizations when the collateral pool balance reaches 10% of its original balance.

The Company also periodically privately issues amortizing notes in transactions that are structured similarly to its public and Rule 144A securitizations but are issued to banks and conduits. The Company’s securitizations and private issuances are collateralized by vehicle retail installment contracts, loans and vehicle leases.

Deficiency and Debt Forward Flow Agreement

In addition to the Company’s credit facilities and secured structured financings, the Company has a flow agreement in place with a third party for charged off assets. Loans and leases sold under these flow agreements are not on the Company’s balance sheet but provide a stable stream of servicing fee income and may also provide a gain or loss on sale.

Off-Balance Sheet Financing

Beginning in 2017, the Company had the option to sell a contractually determined amount of eligible prime loans to Santander, through securitization platforms. As all of the notes and residual interests in the securitizations were issued to Santander, the Company recorded these transactions as true sales of the retail installment contracts securitized, and removed the sold assets from the Company’s consolidated balance sheets. Beginning in 2018, this program has been replaced with a new program with SBNA, whereby the Company has agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchasing of retail loans, primarily from FCA dealers, all of which are serviced by the Company.

The Company also continues to periodically execute securitizations under Rule 144A of the Securities Act. After retaining the required credit risk retention via a 5% vertical interest, the Company transfers all remaining notes and residual interests in these securitizations to third parties. The Company subsequently records these transactions as true sales of the retail installment contracts securitized, and removes the sold assets from the Company's consolidated balance sheet.

Cash Flow Comparison

The Company has historically produced positive net cash from operating activities. The Company’s investing activities primarily consist of originations, acquisitions, and collections from retail installment contracts. SC’s financing activities primarily consist of borrowing, repayments of debt, share repurchases, and payment of dividends.

For the Year Ended December 31,

(Dollar amounts in thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net Cash Provided by Operating Activities

Net cash provided by operating activities decreased by $1.5 billion from the year ended December 31, 2019 to the year ended December 31, 2020, primarily due to $2.3 billion increase to receivables held for sale offset by $0.5 billion increase in proceeds on receivables held for sale and $0.2 billion increase in depreciation and amortization.

Net Cash Used in Investing Activities

Net cash used in investing activities decreased by $4.5 billion from the year ended December 31, 2019 to the year ended December 31, 2020, primarily due to decrease of $2.5 billion in leased vehicles purchased (net) and $1.8 billion decrease in originations of finance receivables held for investment (net).

Net Cash Provided by Financing Activities

Net cash provided by financing activities decreased by $2.7 billion from the year ended December 31, 2019 to the year ended December 31, 2020, primarily due to increase in payments for notes payable of $2.4 billion, and 0.4 billion increase of shares repurchased primarily due to tender offer program, which expired on February 27, 2020.

Contingencies and Off-Balance Sheet Arrangements

For information regarding the Company’s contingencies and off-balance sheet arrangements, refer to Note 7 - "Variable Interest Entities" and Note 15 - "Commitments and Contingencies" in the accompanying consolidated financial statements.

Contractual Obligations

The Company leases its headquarters in Dallas, Texas, its servicing centers in Texas, Colorado, Arizona, and Puerto Rico, and operations facilities in California, Texas and Colorado under non-cancelable operating leases that expire at various dates throug h 2027. T he Company also has various debt obligations entered into in the normal course of business as a source of funds.

The following table summarizes the Company’s contractual obligations as of December 31, 2020:

Less than 1 year

years

years

More than

5 years

Total

(In thousands)

Operating lease obligations

Notes payable - credit facilities and related party

Notes payable - secured structured financings (a)

Contractual interest on debt

Total

(a) Adjusted for unamortized costs of $76 million .

Risk Management Framework

The Company has established a Board-approved Governance Framework that outlines governance principles organized into the following sections: strategic plan; risk identification and assessment; risk appetite; delegation of authority, decision making and accountability; risk management, risk taking and risk ownership; oversight and controls; monitoring, reporting and escalation; incentive compensation; shared services; recovery and resolution planning. The Company also uses three lines of defense risk governance structure that assigns responsibility for risk management among front-line business personnel, an independent risk management function, and internal audit. The Chief Risk Officer (CRO), who reports to the CEO and to the Risk Committee of the Board and is independent of any business line, is responsible for developing and maintaining a risk framework designed to ensure that risks are appropriately identified and mitigated, and for reporting on the overall level of risk in the Company. The CRO is also accountable to SHUSA’s Chief Risk Officer.

The Risk Committee is charged with responsibility for establishing the governance over the risk management process, providing oversight in managing the aggregate risk position and reporting on the comprehensive portfolio of risk categories and the potential impact these risks can have on the Company’s risk profile. The Risk Committee meets no less often than quarterly and is chartered to assist the Board in promoting the best interests of the Company by overseeing policies, procedures and risk

practices relating to enterprise-wide risk and compliance with regulatory guidance. Members of the Risk Committee are individuals whose experiences and qualifications provide broad and informed views on risk matters facing the Company and the financial services industry, including, but not limited to, risk matters that address credit, market, liquidity, operational, compliance and other general business conditions. A comprehensive risk report is submitted by the CRO to the Risk Committee of the Board at least quarterly providing management’s view of the Company’s risk position.

In addition to the Board and the Risk Committee, the CEO and CRO delegate risk responsibility to management committees. These committees include the Asset Liability Committee (ALCO), the Enterprise Risk Management Committee (EMRC), and the Executive Risk Committee. The CRO is a member of each of these committees and chairs the ERMC.

Additionally, the Company has established an Enterprise Risk Management (ERM) function and implemented a Board-approved Enterprise Risk Management Framework to manage risks across the organization in a comprehensive, consistent and effective fashion, enabling the firm to achieve its strategic priorities, including its business plan, within its expressed risk appetite. Accordingly, ERM oversees the implementation of the Board-approved Enterprise Risk Appetite Framework through which ERM manages the Company’s Risk Appetite Statement, which details the type of risk and size of risk-taking activities permissible in the course of executing business strategy.

Credit Risk

The risk inherent in the Company’s loan and lease portfolios is driven by credit and collateral quality, and is affected by borrower-specific and economy-wide factors such as changes in employment. The Company manages this risk through its underwriting, pricing and credit approval guidelines and servicing policies and practices, as well as geographic and other concentration limits.

The Company’s automated originations process is intended to reflect a disciplined approach to credit risk management. The Company’s robust historical data on both organically originated and acquired loans is used by Company to perform advanced loss forecasting. Each applicant is automatically assigned a risk score using information from Credit Bureau and credit application, placing the applicant in one of multiple pricing tiers. The Company continuously maintains and adjusts the pricing in each tier to reflect market and risk trends. In addition to the automated process, the Company maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers. The Company generally tightens its underwriting requirements in times of greater economic uncertainty to compete in the market at loss and approval rates acceptable for meeting the Company’s targeted returns. The Company’s underwriting policy has also been adjusted to meet the requirements of the Company’s contracts such as the MPLFA. In both cases, the Company has accomplished this by adjusting risk-based pricing, the material components of which include interest rate, down payment, and loan-to-value.

The Company monitors early payment defaults and other potential indicators of dealer or customer fraud and uses the monitoring results to identify dealers who will be subject to more extensive requirements when presenting customer applications, as well as dealers with whom the Company will not do business at all.

Market Risk

Interest Rate Risk

The Company measures and monitors interest rate risk on at least a monthly basis. The Company borrows money from a variety of market participants to provide loans and leases to the Company’s customers. The Company’s gross interest rate spread, which is the difference between the income earned through the interest and finance charges on the Company’s finance receivables and lease contracts and the interest paid on the Company’s funding, will be negatively affected if the expense incurred on the Company’s borrowings increases at a faster pace than the income generated by the Company’s assets.

The Company has policies in place designed to measure, monitor and manage the potential volatility in earnings stemming from changes in interest rates. The Company generates finance receivables that are predominantly fixed rate and borrows with a mix of fixed and variable rate funding. To the extent that the Company’s asset and liability re-pricing characteristics are not effectively matched, the Company may utilize interest rate derivatives, such as interest rate swap agreements, to mitigate interest rate risk. As of December 31, 2020, the notional value of the Company’s interest rate swap agreements was $2.7 billion. The Company also enters into Interest Rate Cap agreements as required under certain lending agreements. In order to mitigate any interest rate risk assumed in the Cap agreement required under the lending agreement, the Company may enter into a second interest rate cap ("Back-to-Back"). As of December 31, 2020 the notional value of the Company’s interest rate cap agreements was $20.4 billion, un der which, all notional was executed Back-to-Back.

The Company monitors its interest rate exposure by conducting interest rate sensitivity analysis. For purposes of estimating an impact to earnings, the twelve-month net interest income impact of an instantaneous 100 basis point parallel shift in prevailing interest rates is measured. As of December 31, 2020, the twelve-month impact of a 100 basis point parallel increase in the interest rate curve would decrease the Company’s net interest inco me by $26 million. In addition to the sensitivity analysis on net interest income, the Company also measures Market Value of Equity (MVE) to view the interest rate risk position. MVE measures the change in value of Balance Sheet instruments in response to an instantaneous 100 basis point parallel increase, including and beyond the net interest income twelve-month horizon. As of December 31, 2020, the impact of a 100 basis point parallel increase in the interest rate curve would decrease the Company’s MVE by $73 million.

Collateral Risk

The Company’s lease portfolio presents an inherent risk that residual values recognized upon lease termination will be lower than those used to price the contracts at inception. Although the Company has currently elected not to purchase residual value insurance, the Company’s residual risk is somewhat mitigated by the residual risk-sharing agreement with FCA. Under the agreement, the Company is responsible for incurring the first portion of any residual value gains or losses up to the first 8%. The Company and FCA then equally share the next 4% of any residual value gains or losses (i.e., those gains or losses that exceed 8% but are less than 12%). Finally, FCA is responsible for residual value gains or losses over 12%, capped at a certain limit, after which the Company incurs any remaining gains or losses. From the inception of the agreement with FCA through the year ended December 31, 2020, approximatel y 90% of full term leases have not exceeded the first and second portions of any residual losses under the agreement. The Company also utilizes industry data, including the ALG benchmark for residual values, and employ a team of individuals experienced in forecasting residual values.

Similarly, lower used vehicle prices also reduce the amount that can be recovered when remarketing repossessed vehicles that serve as collateral underlying loans. The Company manages this risk through loan-to-value limits on originations, monitoring of new and used vehicle values using standard industry guides, and active, targeted management of the repossession process.

The Company does not currently have material exposure to currency fluctuations or inflation.

Liquidity Risk

The Company views liquidity as integral to other key elements such as capital adequacy, asset quality and profitability. The Company’s primary liquidity risk relates to the ability to finance new originations through the Bank and ABS securitization markets. The Company has a robust liquidity policy that is intended to manage this risk. The liquidity risk policy establishes the following guidelines:

• that the Company maintain at least eight external credit providers (as of December 31, 2020, it had thirteen);

• that the Company relies on Santander and affiliates for no more than 30% of its funding (as of December 31, 2020, Santander and affiliates provided 26% of its funding);

• that no single lender’s commitment should comprise more than 33% of the overall committed external lines (as of December 31, 2020, the highest single lender’s commitment was 16% (not including repo)); and

• that no more than 35% and 65% of the Company’s warehouse facilities mature in the next six months and twelve months respectively (as of December 31, 2020, one of the Company’s warehouse facilities is scheduled to mature in the next six or twelve months).

The Company’s liquidity risk policy also requires that the Company’s Asset Liability Committee monitor many indicators, both market-wide and company-specific, to determine if action may be necessary to maintain the Company’s liquidity position. The Company’s liquidity management tools include daily, monthly and twelve-month rolling cash requirements forecasts, long term strategic planning forecasts, monthly funding usage and availability reports, daily sources and uses reporting, structural liquidity risk exercises, key risk indicators, and the establishment of liquidity contingency plans. The Company also performs monthly stress tests in which it forecasts the impact of various negative scenarios (alone and in combination), including reduced credit availability, higher funding costs, lower Advance Rates, lending covenant breaches, lower dealer discount rates, and higher credit losses.

The Company generally seeks funding from the most efficient and cost effective source of liquidity from the ABS markets, third-party facilities, and Santander. Additionally, the Company can reduce originations to significantly lower levels, if necessary, during times of limited liquidity.

The Company had established a qualified like-kind exchange program to defer tax liability on gains on sale of vehicle assets at lease termination. If the Company does not meet the safe harbor requirements of IRS Revenue Procedure 2003-39, the

Company may be subject to large, unexpected tax liabilities, thereby generating immediate liquidity needs. The Company believes that its compliance monitoring policies and procedures are adequate to enable the Company to remain in compliance with the program requirements. The Tax Cuts and Jobs Act permanently eliminated the ability to exchange personal property after January 1, 2018, which resulted in the like-kind exchange program being discontinued in 2018.

Operational Risk

The Company is exposed to operational risk loss arising from failures in the execution of our business activities. These relate to failures arising from inadequate or failed processes, failures in its people or systems, or from external events. The Company’s operational risk management program is designed to identify, measure, manage and report operational risks with increased focus on Third Party Risk Management, Business Continuity Management, Information Risk Management, Fraud Risk Management, and Regulatory Compliance Risk Management. Key program elements include Internal and External Event Reviews, Loss Monitoring and Reporting, Scenario Analysis, Issue Management, Risk Reporting and Monitoring, and Risk Control Self-Assessment (RCSA).

To mitigate operational risk, the Company maintains an extensive compliance, internal control, and monitoring framework, which includes the gathering of corporate control performance threshold indicators, Sarbanes-Oxley testing, monthly quality control tests, ongoing compliance monitoring with applicable regulations, internal control documentation and review of processes, and internal audits. The Company also utilizes internal and external legal counsel for expertise when needed. Upon hire and annually, all associates receive comprehensive mandatory regulatory compliance training. In addition, the Board receives annual regulatory and compliance training. The Company uses industry-leading call mining that assist the Company in analyzing potential breaches of regulatory requirements and customer service.

Model Risk

The Company mitigates model risk through a robust model validation process, which includes committee governance and a series of tests and controls. The Company utilizes SHUSA’s Model Risk Management group for all model validation to verify models are performing as expected and in line with their design objectives and business uses.

Other Information

Further information on risk factors can be found under Part I, Item 1A - “Risk Factors”.