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UPDATE 3-U.S. senators grill Wells Fargo CEO over scandal, forced arbitration

* Wells Fargo customers not prevented from suing - CEO

* Lawmakers skeptical that bank's culture has changed

* Bank's auto insurance, mortgage products in spotlight (Adds Fitch downgrade)

Oct 3 (Reuters) - U.S. senators slammed Wells Fargo & Co Chief Executive Tim Sloan on Tuesday for his handling of a massive sales practices scandal at the third-largest American bank and challenged him to allow aggrieved customers to sue.

Wells Fargo has disclosed that its employees potentially created as many as 3.5 million accounts without authorization. Sloan, when pressed by Senate Banking Committee lawmakers, said the San Francisco-based bank would not prevent customers from suing.

"We haven't done that. We're not doing that," Sloan said.

But lawyers for Wells Fargo have asked a federal court in Utah to compel arbitration of a lawsuit over the opening of the unauthorized accounts, arguing that customers who were affected had agreed to arbitration, Reuters Legal reported in September.

"If that (report) is true, it directly contradicts your testimony to this committee," Democratic Senator Chris Van Hollen told Sloan, who responded that he would look into the case.

Wells Fargo is fighting some customers in court for now, company spokeswoman Jennifer Dunn said, but the bank has made a $142 million settlement offer to settle all disputes arising from the scandal, which erupted last year.

"As Tim emphasized today, Wells Fargo is committed to making things right with our customers, Dunn said.

Senators also flagged problems involving the bank's auto insurance and mortgage fees that came to light months after Wells Fargo disclosed the potentially phony accounts. The ensuing scandal hammered the lender's reputation and sparked management changes, lawsuits and government probes.

Senator Elizabeth Warren dismissed suggestions Sloan could be an agent of change at the bank and called for his firing.

"Wells Fargo is not going to change with you in charge," said Warren, a prominent critic of Wall Street and a possible 2020 presidential candidate.

Democratic Senator Heidi Heitkamp said she was skeptical that there had been a cultural shift at Wells Fargo.

"I would caution you when you say, this is everything, that is what the last CEO told us and then the insurance scandal broke," she said.

Sloan, a 30-year veteran at the bank, took over as CEO when his predecessor, John Stumpf, resigned in October 2016, less then a month after appearing before the same Senate committee.

"I am angry about how we handled the problems historically," Sloan said, also noting that his knowledge of Wells Fargo and the actions he had taken since becoming CEO made him qualified to lead the bank.

Wells Fargo shares reversed earlier losses to close up 0.2 percent on Tuesday.

Also on Tuesday, Fitch Ratings downgraded Wells Fargo's credit rating by one notch to "A+" from "AA-", saying that the company's earnings profile will be "diminished" from historical levels and that improvements in risk governance and controls will take longer than anticipated.

REGULATORY, LEGAL TANGLES

The stakes are high for Sloan as he tries to shake the scandal.

The Office of the Comptroller of the Currency, the leading regulator for Wells Fargo, is considering new sanctions against the bank for customer abuses involving auto insurance and mortgage loans, Reuters reported on Monday.

Wells Fargo a year ago reached a $190 million settlement with regulators after it said employees had potentially opened as many as 2.1 million unauthorized accounts to meet internal sales targets. The bank raised that estimate in August to potentially as many as 3.5 million.

Sloan said on Tuesday he was "confident" no more than 3.5 million unauthorized accounts were opened.

Warren, who last year accused Stumpf of "gutless leadership," has repeatedly called on the Federal Reserve to remove 12 members of Wells Fargo's board of directors, including Vice Chair Elizabeth Duke.

Duke, a former Fed governor, is set to take over from Wells Fargo Chairman Stephen Sanger at the start of 2018.

Wells Fargo's problems with auto insurance and mortgage products emerged publicly this year. In late July, it said hundreds of thousands of customers were due a refund on auto insurance that they did not need.

In late August, a homeowner sued Wells Fargo for charging too much for his fixed-rate mortgage. Sloan said on Tuesday the bank will contact 108,000 mortgage customers to remediate any complaints they may have about a fee paid to lock in rates.

The bank has said its rate-lock service is under investigation by the Consumer Financial Protection Bureau.

(Additional reporting by Ross Kerber in Boston and Pete Schroeder in Washington; Writing by Meredith Mazzilli; Editing by Carmel Crimmins, Paul Simao and Jonathan Oatis)