Wells Fargo, awash in scandal, faces violations over car insurance refunds

Gretchen Morgenson

Wells Fargo, the scandal-plagued bank, is facing new regulatory scrutiny for not refunding insurance money owed to people who paid off their car loans early, according to people briefed on the inquiry.

Just last month Wells Fargo was found to have forced unneeded collision insurance on consumers who financed their car purchases. That practice, first disclosed by The New York Times, affected 800,000 customers according to an analysis commissioned by the bank. Some 274,000 people were pushed into delinquency as a result, and 25,000 cars were wrongly repossessed.

The latest inquiry, by officials at the Federal Reserve Bank of San Francisco, where the bank has its headquarters, involves a different, specialized type of insurance that is sold to consumers when they buy a car. Called guaranteed auto protection insurance, or GAP, it is intended to protect a lender against the fact that a car — the collateral for its loan — loses significant value the moment it is driven off the lot.

A woman passes a Wells Fargo sign.
Charles Mostoller | Reuters

GAP insurance, also known as guaranteed asset protection, makes up that difference for a lender if, for instance, a car is stolen before the loan is paid off. Regular car insurance typically covers only the current market value.

Because Wells Fargo is a large auto lender, tens of thousands of customers may have been affected by the bank's actions on GAP insurance.

It is not mandatory for car buyers to carry GAP insurance, which typically costs $400 to $600. But car dealers push the insurance, and lenders like it because of the protection it provides. When borrowers pay off the loans early, they are entitled to a refund of some of the GAP insurance premium because the coverage they paid for is no longer needed.

Laws in nine states require that customers get unused insurance money back. They are Alabama, Colorado, Indiana, Iowa, Maryland, Massachusetts, Oklahoma, Oregon and South Carolina.

Jennifer A. Temple, a Wells Fargo spokeswoman, provided a statement saying: "During an internal review, we discovered issues related to a lack of oversight and controls surrounding the administration of Guaranteed Asset Protection products. We are reviewing our practices and actively working with our dealers and have already begun making improvements to the GAP refund process. If we find customer impacts, we will make customers whole."

Ms. Temple declined to say when the problem began. She said the bank was trying to assess how many customers had been affected. Wells Fargo improved controls on the refund process in 2014, she said. The unit of the bank that makes car loans is called Wells Fargo Dealer Services.

Asked about the regulatory inquiry into GAP insurance at Wells Fargo, Darren Gersh, a spokesman for the Federal Reserve Board in Washington said, "We are focused on ensuring that the root causes of a firm's compliance and controls breakdowns are understood and addressed." He declined to comment on the specifics, adding that "the Federal Reserve Board will take any regulatory and supervisory steps we feel are necessary to ensure the firm's attention to compliance."

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A failure to refund the insurance money harmed borrowers whose cars were repossessed by increasing what they owed, a figure that the bank reports to consumer credit bureaus. All 50 states require that the amount of unused insurance be credited to those borrowers' accounts, reducing the amount owed.

The bank alluded to the new problem briefly in its quarterly financial statement issued Friday. "The company has identified certain issues related to the unused portion of guaranteed auto protection waiver or insurance agreements between the dealer and, by assignment, the lender, which may result in refunds to customers in certain states," Wells Fargo said in the filing.

"These and other issues related to the origination, servicing and/or collection of indirect consumer auto loans, including related insurance products, may subject the company to formal or informal inquiries, investigations or examinations from federal, state and/or local government agencies, and may also subject the company to litigation."

GAP coverage is similar to home mortgage insurance, which shields lenders against a default if a borrower loses his or her job and cannot make the payments.

Car buyers who finance their purchases typically add the cost of the GAP coverage to the amount of the loan. The interest that borrowers pay on the coverage goes to the bank that made the loan.

"Dealer Services is on a journey to strengthen its business, fix problems and help build a better Wells Fargo," Ms. Temple said. "We've taken huge proactive steps to improve the customer experience."

The new problem raises questions about Wells Fargo's internal controls and its board's oversight of company operations.

In a separate crisis at Wells Fargo that was exposed last year, bank employees were found to have created millions of credit card and bank accounts that customers had not requested. That led to millions of dollars in fines and the departure of the chief executive, John G. Stumpf.

Wells Fargo: Legal costs could surpass $3.3 billion reserves
Wells Fargo: Legal costs could surpass $3.3 billion reserves

More recently, after the disclosure that the bank had forced auto insurance on customers who did not need it, several Democratic lawmakers asked that hearings be convened to learn more.

Senator Elizabeth Warren, a Massachusetts Democrat who is on the Senate Banking Committee, also reiterated her request that the Fed oust 12 of Wells Fargo's 15 directors, saying they had violated their duties to oversee risk management at the bank in the period when the improprieties had taken place.

In its regulatory filing on Friday, Wells said its directors had undertaken actions to enhance governance and oversight.

"The board recognizes that there is still work to be done, and, in response to feedback received at our annual stockholders meeting in April 2017, the board is engaging in an ongoing comprehensive review of its structure, composition and practices," it said. The bank expects the review to result in changes to be disclosed in the coming months, it added.

In a statement to employees issued Friday with the filing, Timothy J. Sloan, Wells Fargo's chief, said, "To regain the trust we have lost, we must continue to be transparent with all our stakeholders and go beyond what has been asked of us by our regulators by reviewing all of our operations — leaving no stone unturned — so we can be confident we have done all that we can do to build a better, stronger Wells Fargo."