Only weeks after being accused of pushing hundreds of thousands of auto loan customers into paying for unwanted and unnecessary insurance plans, Wells Fargo finds itself in another possible insurance scandal, with banking regulators investigating claims that Wells allegedly failed to refund insurance money to some borrowers who paid off their car loans early.
The New York Times, citing people briefed on the matter, reports that the Federal Reserve Bank of San Francisco is looking into Wells Fargo Dealer Services protocols and controls related to guaranteed auto protection (GAP) insurance.
What Is GAP Insurance?
GAP insurance, which typically costs between $600 and $400, is intended to protect a lender against the devaluation of a vehicle.
For instance, if a car is stolen before the loan is paid off, the GAP insurance would make up the value difference for a lender.
Vehicle owners aren’t required to take out the insurance plans.
The cost of GAP insurance is typically built into a borrower’s car loan. If a borrower pays off their car loan early, their lender is required under state law in Alabama, Colorado, Indiana, Iowa, Maryland, Massachusetts, Oklahoma, Oregon, and South Carolina to refund the unused amount to the customer.
An Alleged Refund Problem?
This may not have happened for some Wells Fargo customers, the Times reports.
In the case that a Wells Fargo borrower’s car was repossessed, the Times notes that these borrowers may have been harmed because the failure to provide a refund made the total owed more than it actually was.
Wells Fargo revealed in a quarterly filing [PDF] with the Securities and Exchange Commission last week that it had identified issues related to the unused portion of GAP insurance waivers and insurance agreements between dealers and lenders.
This, the company said, could result in refunds to some customers.
“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,” the filing states.
A rep for Wells Fargo tells the Times that the company identified issues related to oversight and controls in the administration of GAP products during an internal review.
The company, she said, is reviewing its practices and working with dealers to make improvements to the refund process. The bank previously improved controls on its refund process in 2014, the rep noted.
Wells Fargo is working to determine how man customers were affected by the issues and will provide refunds where necessary.
A rep for the Federal Reserve Board tells the Times that it is “focused on ensuring that the root causes of a firm’s compliance and controls breakdowns are understood and addressed.” The agency will take any regulatory or supervisory steps necessary, the rep added.