Wells Fargo, the bank raging in scandal, 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.
GAP insurance, also called 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 compulsory 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.
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 brought to light 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.