Auto finance companies need to be aware of guaranteed asset protection (GAP) product refund procedures in the wake of recent scrutiny, said Kenneth Rojc, partner at Nisen and Elliott LLC, adding that nearly every one of his clients is reviewing its policies.
Last month, Ally Financial Inc. tweaked its GAP refund policy to encompass all 50 states under the stricter rules required by at least nine states, the lender told Auto Finance News. The change came just a week before it was revealed that Wells Fargo Dealer Services would face regulatory action for its GAP refund practices.
The Federal Reserve Bank of San Francisco and the Office of the Comptroller of the Currency are investigating the matter, which may lead to consumer payouts, litigation, and federal investigations, Wells Fargo disclosed in an August Securities and Exchange Commission filing.
Many lenders pay for insurance coverage upfront and then finance the amount into the consumer’s loan and collect interest on the payments. However, sometimes borrowers pay off the retail installment contracts early and in several states lenders are responsible for refunding or ensuring that payments are made to consumers, Rojc said.
Effective Aug. 1, Ally applied its policy in those select states nationwide. “This move creates a consistent process nationwide that ensures all Ally customers who prepay their contracts get the refunds they are entitled to receive,” Ally told AFN in a statement.
Ally GAP coverage includes its own internal GAP product, whereas Wells uses third-party providers. A Wells Fargo spokeswoman told AFN that the bank continues to investigate how many borrowers have been impacted by the GAP policy.
“We identified a need for greater oversight over the refund process — which has historically been handled by individual auto dealers,” she said. “While the dealer provides the refund to the customer, some states require that the holder of the contract ensures the refund is made properly. Our review found that internal controls to confirm the refund were not adequate. That’s what we are researching and evaluating now, and if customers did not receive a refund, we will make it right.”
This GAP insurance issue is separate from the larger force-placed insurance scandal plaguing Wells Fargo.
