Forced Protection: How Will The Industry Respond to Wells Fargo’s Insurance Scandal?

Typically, when one of the nation’s largest auto lenders returns $80 million to consumers it wrongly charged, industry leaders stop to ask how they can prevent a similar scenario at their respective companies.

But in the case of Wells Fargo Dealer Services’ admitted mishandling of its force-placed insurance policy, the lender appears to be an outlier among the top financial institutions in the space.

After The New York Times first reported the issue in July, Wells Fargo & Co. announced that it would pay $80 million in remediations to some 500,000 consumers who were forced to pay for insurance placed by National General that they didn’t need because they had already paid for outside coverage. The policy, known as collateral protection insurance (CPI), sent 274,000 borrowers into delinquency and caused 20,000 wrongful repossessions between 2012 and 2016, the bank claims.

A 60-page report issued by Wells Fargo and prepared by consulting firm Oliver Wyman found even higher numbers of 800,000 affected consumers and 25,000 repossessions, according to NYT.

Although many sources Auto Finance News contacted in the aftermath of the scandal expressed an assumption that collateral protection insurance was a fairly pervasive offering in the industry, several lenders have largely abandoned the practice, if they ever implemented it at all. Ally Financial Inc., Bank of America Dealer Financial Services, Capital One Auto Finance Inc., Chase Auto Finance, Ford Motor Credit Co., and Santander Consumer USA all confirmed to AFN that they don’t engage in collateral protection insurance practices.

“In our practice, we don’t force-place insurance, and most prime lenders don’t,” an auto executive at a top-10 financial institution — according to Big Wheels Auto Finance 2017 — told AFN on the condition of anonymity. “Wells Fargo appears to be an outlier among big banks.”

The practice of force-placed insurance is highly concentrated in subprime and deep-subprime buy-here-pay-here dealers and credit unions, several sources told AFN. Other players in the space include Assurant Specialty Property, Berkshire Risk Services LLC, and State National — which was acquired by Markel Corp. earlier this year and is one of the largest CPI providers for credit unions, according to the company.

But, if this Wells Fargo case brings further regulatory scrutiny, it could cause insurers to stop offering CPI and lenders to stop utilizing the offering, an insurance analyst who wished to remain unnamed told AFN

“A lot of banks have elected to self-insure it — they will just run the risk,” he said. “It’s been a trend in that direction in the current credit environment, but you see it with big banks where they look at it and say, ‘We’re big enough to absorb it, why are we going to pay an insurer a margin to do this?’”

Still, smaller institutions may not want to run that risk, and others consider CPI vital to ensuring payment streams continue when those loans are securitized, the analyst added.

Wells Fargo continues to assess the full impact of the policy amid consumer lawsuits, Congressional condemnation, and possible regulatory action, but to move forward, you have to know what went wrong.

What Is CPI and What Went Wrong?

Let’s start with the basics. Consumers are required by law to have liability insurance, which is a policy that covers an event in which the customer is the at-fault driver and causes property or bodily damage to another driver, Michael Barry, vice president of media relations at the Insurance Information Institute, explained to AFN. The policy does not cover the borrower’s own vehicle; it insures the financial responsibility of damage done to another.

Lenders can’t force this insurance on consumers for two reasons: First, police enforce it whenever they pull someone over and ask for proof of insurance, or when a consumer gets his tags renewed. Second, lenders underwrite the borrower’s vehicle, and thus has no stake in the damage that consumer might cause to other property or people on the road.

However, there are two other insurance products that have near universal penetration among drivers: comprehensive and collision insurance. Although consumers are not required to have this coverage by law, 78% of insured drivers purchase comprehensive coverage and 73% buy collision coverage in addition to the mandatory liability insurance, according to a 2013 Insurance Information Institute report.

Collision insurance covers the vehicle from a collision with another driver, but it also covers an impact with a stationary object. Comprehensive coverage handles all other kinds of non-collision damages, such as flooding, fires, natural disasters, etc.

Many lenders — including those in prime credit tiers — contractually require borrowers to purchase these additional coverage types, but few take the extra step of force-placing the insurance when borrowers don’t comply, the unnamed lender told AFN.

Wells Fargo enlisted National General to take that extra step of force-placing insurance. The bank stopped placing CPI policies from National General in September 2016, but consumers legally forced into the product prior to that date remained on for another year, a Wells Fargo Dealer Services spokeswoman told AFN. The bank is reviewing its vendor oversight policies, she added. And for National General’s part, the insurer has stated it was

The bank is reviewing its vendor oversight policies, she added. And for National General’s part, the insurer has stated it was in the right.

Although Wells Fargo declined to describe the exact procedure it, or National General, uses to ensure consumers aren’t being wrongfully charged for insurance, another CPI vendor agreed on condition of anonymity to explain its process — which, according to this source, is “really common” in the industry. The insurer said there are three ways the CPI process could have broken down in Wells Fargo’s case. The first is if National General had some failure in its tracking process. Insurers have a center that tracks all inbound and outbound messages — calls, email, fax, etc. — and matches that information with the borrower’s information through a centralized

The insurer said there are three ways the CPI process could have broken down in Wells Fargo’s case. The first is if National General had some failure in its tracking process.

Insurers have a center that tracks all inbound and outbound messages — calls, email, fax, etc. — and matches that information with the borrower’s information through a centralized content-management system. When the vendor gets a notice of a policy cancellation, it contacts the original insurance provider and asks for confirmation. Once confirmed, the vendor sends a notice to the consumer to provide proof of insurance. Some states require a 30-day period for consumers to provide proof of insurance, so once the initial notice is sent to consumers, the vendor waits 20 days, sends a second letter, and then places the policy another 10 days later.

Anywhere along these various steps, an insurer like National General could accidentally charge someone who already has insurance, and these false placements happen with some regularity, the source told AFN.

“We believe that our practices in this highly regulated industry are compliant,” National General Chief Executive Barry Karfunkel said during the company’s second-quarter earnings call. “We’re reviewing recently filed litigation that we cannot comment on any further at this time.” When false placements do happen, it falls on the lender to refund the borrower. This is the second friction point where Wells Fargo could have messed up, the source said. The lender is provided all this information tracked by the vendor and is tasked with appropriately crediting consumers who overpaid. The insurance analyst said that the fault seems to fall mostly on Wells Fargo, especially given that National General bought the CPI portfolio from QBE Insurance Group less than a year before Wells discontinued the business. “These [allegations] are not actions that National General is responsible for or could even really do,” the analyst said. “Those are actions that Wells is

When false placements do happen, it falls on the lender to refund the borrower. This is the second friction point where Wells Fargo could have messed up, the source said. The lender is provided all this information tracked by the vendor and is tasked with appropriately crediting consumers who overpaid. The insurance analyst said that the fault seems to fall mostly on Wells Fargo, especially given that National General bought the CPI portfolio from QBE Insurance Group less than a year before Wells discontinued the business. “These [allegations] are not actions that National General is responsible for or could even really do,” the analyst said. “Those are actions that Wells is

The insurance analyst said that the fault seems to fall mostly on Wells Fargo, especially given that National General bought the CPI portfolio from QBE Insurance Group less than a year before Wells discontinued the business. “These [allegations] are not actions that National General is responsible for or could even really do,” the analyst said. “Those are actions that Wells is responsible for. National General does not repo cars, Wells does. National

“These [allegations] are not actions that National General is responsible for or could even really do,” the analyst said. “Those are actions that Wells is responsible for. National General does not repo cars, Wells does. National General does not send funds into or out of client’s bank accounts, Wells does.” The third option is some combination of the two, the CPI provider said. “It compounds on each other,” the source speculated on the scenario. “National General provides incomplete information to Wells Fargo, which causes them to make incomplete entries, which is then going into files that are getting sent back to National General, and you get this kind of ping-pong effect.”

The third option is some combination of the two, the CPI provider said. “It compounds on each other,” the source speculated on the scenario. “National General provides incomplete information to Wells Fargo, which causes them to make incomplete entries, which is then going into files that are getting sent back to National General, and you get this kind of ping-pong effect.”

“It compounds on each other,” the source speculated on the scenario. “National General provides incomplete information to Wells Fargo, which causes them to make incomplete entries, which is then going into files that are getting sent back to National General, and you get this kind of ping-pong effect.”

Why Use CPI at All?

“Wells Fargo is doing this to protect their collateral in the vehicle,” the Insurance Information Institute’s Barry said. “It’s understandable that a lender, no matter who it is, would want that borrower to have comprehensive and collision insurance.” The only reason to not have these vehicle protections is if the car is so old that a collision larger than a fender bender would make it more logical to buy a new car than repair it, he added. That’s why the practice is most prevalent in deep-subprime credit bands, the insurance vendor explained. Lenders don’t want borrowers to have the CPI policy — they’d rather the consumer go out and purchase the cheaper policy on their own — but many subprime consumers try to avoid the additional insurance payment. “What I see is CPI is used as a way to avoid lots of friction — the back and forth of constantly arguing and chasing insurance — and a way to ensure that the vehicles are always covered,” the vendor said. “It’s not ideal. In a perfect world, everyone would have their own insurance policy. But the CPI keeps them in a position where they are able to get their kids to school, get themselves to

The only reason to not have these vehicle protections is if the car is so old that a collision larger than a fender bender would make it more logical to buy a new car than repair it, he added. That’s why the practice is most prevalent in deep-subprime credit bands, the insurance vendor explained. Lenders don’t want borrowers to have the CPI policy — they’d rather the consumer go out and purchase the cheaper policy on their own — but many subprime consumers try to avoid the additional insurance payment. “What I see is CPI is used as a way to avoid lots of friction — the back and forth of constantly arguing and chasing insurance — and a way to ensure that the vehicles are always covered,” the vendor said. “It’s not ideal. In a perfect world, everyone would have their own insurance policy. But the CPI keeps them in a position where they are able to get their kids to school, get themselves to

That’s why the practice is most prevalent in deep-subprime credit bands, the insurance vendor explained. Lenders don’t want borrowers to have the CPI policy — they’d rather the consumer go out and purchase the cheaper policy on their own — but many subprime consumers try to avoid the additional insurance payment. “What I see is CPI is used as a way to avoid lots of friction — the back and forth of constantly arguing and chasing insurance — and a way to ensure that the vehicles are always covered,” the vendor said. “It’s not ideal. In a perfect world, everyone would have their own insurance policy. But the CPI keeps them in a position where they are able to get their kids to school, get themselves to

“What I see is CPI is used as a way to avoid lots of friction — the back and forth of constantly arguing and chasing insurance — and a way to ensure that the vehicles are always covered,” the vendor said. “It’s not ideal. In a perfect world, everyone would have their own insurance policy. But the CPI keeps them in a position where they are able to get their kids to school, get themselves to work, and keep their heads above water. “I’ve talked to a number of dealers that explain that’s why they use the CPI,” he continued. “They aren’t trying to be good samaritans. What they are trying to do is ensure stable payment streams on their

“I’ve talked to a number of dealers that explain that’s why they use the CPI,” he continued. “They aren’t trying to be good samaritans. What they are trying to do is ensure stable payment streams on their finance portfolio, and to do that they have to keep their customer stable. Keeping the customer stable — although it works to the buy-here-pay-here dealer’s benefit — also works for the customer’s benefit.” Even if lenders are willing to navigate the regulatory landscape of CPI, insurers might not be. Before selling it to QBE Insurance and before it was acquired by National General, Bank of America owned the CPI portfolio in question. Back then the portfolio was worth “north of $2 billion,” but today it is worth about $300 million, the insurance analyst said. “There was a lot of reform that came through, they put in a lot of regulations and strictness [that] took out a lot of the potential for profitability,” he said. “It used to be that if you force-placed the policy on somebody who lapsed it was pretty much gouging them. That’s not the case anymore, and you can see it in the profitability and the premiums.” National General wrote $4.3 billion worth of premiums in the past year, and its Wells Fargo CPI book is only worth $50 million. Additionally, insurers are losing 10 cents

Even if lenders are willing to navigate the regulatory landscape of CPI, insurers might not be. Before selling it to QBE Insurance and before it was acquired by National General, Bank of America owned the CPI portfolio in question. Back then the portfolio was worth “north of $2 billion,” but today it is worth about $300 million, the insurance analyst said. “There was a lot of reform that came through, they put in a lot of regulations and strictness [that] took out a lot of the potential for profitability,” he said. “It used to be that if you force-placed the policy on somebody who lapsed it was pretty much gouging them. That’s not the case anymore, and you can see it in the profitability and the premiums.” National General wrote $4.3 billion worth of premiums in the past year, and its Wells Fargo CPI book is only worth $50 million. Additionally, insurers are losing 10 cents

“There was a lot of reform that came through, they put in a lot of regulations and strictness [that] took out a lot of the potential for profitability,” he said. “It used to be that if you force-placed the policy on somebody who lapsed it was pretty much gouging them. That’s not the case anymore, and you can see it in the profitability and the premiums.” National General wrote $4.3 billion worth of premiums in the past year, and its Wells Fargo CPI book is only worth $50 million. Additionally, insurers are losing 10 cents

National General wrote $4.3 billion worth of premiums in the past year, and its Wells Fargo CPI book is only worth $50 million. Additionally, insurers are losing 10 cents for every dollar they spend on  lender-placed insurance. “National General is more profitable without [its CPI portfolio],” he said. “I would not be surprised if they just shuttered the entire business in the next six months.”

“National General is more profitable without [its CPI portfolio],” he said. “I would not be surprised if they just shuttered the entire business in the next six months.”

Further Damage to Wells Fargo

This scandal has already cost Wells Fargo Dealer Services $80 million, and analysts are anticipating more damages.

“We believe the full cost may be significantly higher and weigh on the risk premium the market will place on shares,” Piper Jaffray analyst Kevin Barker wrote in a note to clients entitled “Here We Go Again?” in reference to the earlier faked checking accounts scandal that dealt the lender a $110 million fine from the Consumer Financial Protection Bureau. “Why didn’t the company address these issues publicly while they were already dealing with the account scandal rather than address them now? What other collateral damage may have been caused by the repossession of these cars on peoples’ lives?”

Wells Fargo is still investigating what effect the CPI policy might have had on active-duty servicemembers, the company’s spokeswoman confirmed to AFN. Back in September 2016, the same time the lender learned of the faulty CPI policy and the accounts scandal, Wells Fargo Dealer Services paid $24 million in a consent order issued by the Department of Justice and Office of the Comptroller of the Currency for 413 illegal repossessions of servicemember vehicles. The bank’s internal report already confirmed that some of the wrongful repossessions caused by CPI were of active-duty servicemembers.

“We are reviewing accounts now to determine how many impacted customers are also active-duty servicemembers,” the spokeswoman said. “This process involves reviewing the Department of Defense’s Defense Manpower Data Center and account records to determine active-duty status. Once we understand the situation more completely, we will reach out to these customers to make things right, including refunding fees and charges as a result of inappropriately placed CPI.”

One such borrower detailed their experience anonymously on the CFPB’s complaint database. “The vehicle was insured and covered by law,” an anonymous Wells Fargo borrower posted in December 2015. “During [my 12-month deployment], Wells Fargo Dealer Services implemented their own insurance and charged me discreetly. This has caused my loan to fall into delinquency.”

Wells Fargo is already facing down legal challenges and possible regulatory action, but it’s the court of public opinion that may do some of the greatest damage as investors read of the damage done to consumers.

“Upon viewing my payments online, I noticed the collateral protection charge is still factored in to the amount and [is] now saying I owe $1,100,” a Wells Fargo consumer wrote to the bureau in June 2016. “This is absurd, I am a single parent with kids and I work [multiple] jobs just to make ends meet. For Wells Fargo to take advantage of me and mislead me by adding on collateral protection insurance of their own, when I have sent valid proof that I had valid coverage insurance — it shows the length a big company like Wells Fargo would go through to deceive good paying consumers.”

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