Wells Fargo Dealer Services’ indirect loan charge-offs increased nearly 50% year over year, driven primarily by the lender’s forced insurance scandal, the company disclosed in its third-quarter earnings.
In September 2016, Wells Fargo stopped placing collateral protection insurance (CPI) policies — which charged at least 500,000 borrowers for insurance they didn’t need — and put together a process to manually review past-due accounts with CPI before considering them eligible for repossession.
“These reviews are still ongoing, because it is important that we take the time to get it right for customers,” company spokeswoman Natalie Brown told Auto Finance News this week. “This moratorium impacts charge-offs because even if we haven’t yet manually reviewed an account, we have to charge off delinquent accounts at 120 days.”
Net charge-offs were up $65 million year over year to $198 million, but the company expects losses to stabilize once all CPI accounts are reviewed. However, the company was unable to address why charge-offs are being impacted now when the problem was first discovered a year ago.
Additionally, the company’s originations were down 47% YoY as part of an ongoing strategy of tightened underwriting standards. Volume declines are expected to continue into the second half of 2018, but Wells Fargo & Co. Chief Financial Officer John Shrewsberry did say he expects performance to start to increase before then.
“We’d rather have a higher credit profile of the average customer just so that we know we’re dealing with fewer defaults as we [consolidate our collection centers],” Shrewsberry said. “Auto will look better because we’ve taken out the low end of the credit quality.”
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