After Wells Fargo said last week that it improperly charged customers for auto insurance, the company has once again shown its propensity to bathe its brand in scandal.

But some consumer advocates are questioning whether Wells is the only lender beset with problems in the niche market for lender-placed auto insurance.

Wells’ latest auto scandal has put a spotlight on an opaque corner of the industry — and put relationships between banks and insurers under closer regulatory scrutiny. California’s insurance regulator said Tuesday that it would begin a probe into Wells and its insurance vendor, National General; regulators in New York subpoenaed Wells last week.

Over the past two decades, many big banks have pulled back from the lender-placed auto market, following a frenzy of litigation in the mid-1990s, according to industry observers. Still, premiums have begun to grow in recent years, as some regional banks have remained in the business and new auto finance companies increasingly use lender-placed policies to protect their collateral.

“Why would we think that National General was limiting its crappy practices to its biggest client?” said Birny Birnbaum, a former economist with the Texas Department of Insurance who now serves as executive director of the nonprofit Center for Economic Justice.

It’s unclear how many banks in the industry use lender-placed auto insurance, a type of coverage purchased by lenders to protect themselves from losses. The insurance is mostly used in cases where borrowers’ insurance policies have lapsed, or where they have stopped making regular payments.

American Banker contacted 18 big banks to inquire about the auto insurance they offer. Most said that they do not use lender-placed insurance, but at least two regionals — Fifth Third Bancorp in Cincinnati and BB&T in Winston-Salem, N.C. — confirmed that they provide it.

BB&T issues lender-placed coverage through its direct-lending business, and a spokesman said the company has “very strict controls in place.” BB&T does not provide the policies on dealer-financed loans including those made by Regional Acceptance, its subprime auto lender. The company did not say whether it uses an insurance vendor.

Fifth Third provides coverage through a contract with van Wagenen, a lender-placed insurance company in Eden Prairie, Minn., according to a spokeswoman.

Meanwhile, a spokesman for Huntington Bancshares in Columbus, Ohio, which has recently expanded in auto lending, said the company “has nothing to share at this time.”

National General did not respond to a request for comment. During a second-quarter earnings call Tuesday, CEO Barry Karfunkel said he believes his company’s practices “in this highly regulated industry are compliant.”

It is unclear how prevalent the policies are among smaller lenders. Outside of the banking industry, force-placing auto insurance is common among auto finance companies, observers said.

“It’s absurd to say that [lenders] aren’t going to protect their own interest,” said Birnbaum, discounting the idea that most lenders do not provide lender-placed auto insurance.

Signs of concern

Problems in Wells’ auto division have turned the industry’s focus to lender-placed auto insurance — also referred to as collateral-protection insurance, or force-placed insurance.

Wells, which is still reeling from last fall’s phony-accounts scandal, unnecessarily charged more than a half a million customers for coverage provided through National General, Wells said in a July 27 statement. For many cash-strapped borrowers, the charges resulted in delinquency and even default.

The results were severe. For about 20,000 borrowers, the charges may have led to defaults and vehicle repossessions, the company said. About 60,000 borrowers did not receive the necessary disclosures that were required under state laws, according to Wells.

“We take full responsibility for our failure to appropriately manage the CPI program and are extremely sorry for any harm this caused our customers, who expect and deserve better from us,” Franklin Codel, head of Wells Fargo Consumer Lending, said in the statement.

Wells stopped providing the insurance in September 2016, around the time it settled charges that 5,300 bankers created about 2 million fake accounts. The settlement kicked off a bruising reputational crisis.

The revelations come amid signs that the market is gaining steam. Between 2012 and 2016, gross earned premiums — a measure of how much insurers collected on written policies — grew by roughly 80% to more than $770 million, according to data collected by the National Association of Insurance Commissioners, and compiled by the Center for Economic Justice.

A number of factors could be driving the uptick, according to industry experts, who noted the recent boom in auto sales and lending as well as the potential for inconsistent data collection practices on the part of regulators.

The entrance of new auto finance companies in the market could be another factor, according to John Van Alst, an attorney with the National Consumer Law Center.

“We’ve seen a lot of folks getting into this area who might not have been around the last time a lot of the litigation took place,” Van Alst said, noting the wave of lawsuits in the mid-1990s.

Anatomy of a business line

Lender-placed auto insurance typically works like this: In order to receive an auto loan, a borrower must show proof of insurance just as would be required of a homebuyer before a mortgage closing.

Banks contract with insurance companies, which use large databases to track the status of their borrowers’ insurance coverage. In the event that the policies lapse or the borrowers stop making payments, banks will send a series of letters to them.

If the borrower fails to obtain coverage voluntarily, the lender may place an insurance policy on the loan. The coverage is typically more expensive than other options, and it allows banks to collect in the event of theft or significant damage. For borrowers, the coverage often results in higher monthly payments.

There are a number of ways that banks can provide the policies, experts said. One way is for the bank to obtain a group policy through an insurance vendor, and then, as needed, charge customers for coverage.

Lenders can also obtain blanket insurance policies, where premiums are assessed on the total value of a bank’s auto exposure. The cost of coverage for blanket polices is often recouped through higher interest rates or other fees.

“We’ve seen a lot of smaller creditors move to charging customers up front,” Van Alst said.

Lender-placed auto insurance was the subject of a wave of litigation during the 1990s, involving lenders including Bank One, which is now part of JPMorgan Chase, and General Motors Automotive Co. The lawsuits touched on a range of issues, including consumer disclosures, commissions and fees charged for services like insurance tracking.

Around this time, banks across the industry pulled back from the business.

“From what I saw in the marketplace, most banks said screw it, we’re not going to deal with this anymore,” said Robert Wallan, an attorney with Pillsbury Winthrop Shaw Pittman in Los Angeles. “It’s too much of a legal and reputational risk.”

However, Wallan said that there’s nothing inherently improper about providing lender-placed auto insurance. Managed well, he said, it can provide necessary protection from losses for the lender, and it can be beneficial to troubled borrowers in case of an emergency.

Most auto loan contracts include a provision allowing a lender to place insurance on a loan, to protect the value of its collateral, experts said.

Still, consumer advocates say the way the market operates puts borrowers at a disadvantage. Many describe it as “reverse competition” — that is, where market competition pushes up costs for consumers, rather than down.

Instead of competing for customers directly, insurance companies compete for vendor relationships with banks and other lenders. The vendors often win business with banks by offering reduced-cost insurance tracking services, revenue-sharing arrangements, expense reimbursements, commissions, or other sweeteners, observers said.

While those add-ons can be a boon for banks, they have the effect of driving up premiums for consumers. For borrowers who have fallen behind on their insurance payments, the consequences can be significant.

Take Wells as the key example. According to an independent report prepared for Wells and obtained by The New York Times, more than 800,000 customers were automatically charged for insurance they did not need, because they had already obtained coverage. National General, Wells’ insurance provider, was supposed to check the status of borrowers’ insurance coverage.

Many borrowers appeared to not have noticed the redundant charges. For a period of time, ending in 2013, Wells Fargo received commissions for the insurance policies it sold, according to the Times report.

“That’s putting a scam on top of a scam,” said Robert Hunter, director of insurance at the Consumer Federation of America and a commissioner of insurance in Texas. “You have people being sold insurance and don’t even know it, and were never warned that they had other options.”

Broader fallout?

What the Wells auto insurance case means for the industry is uncertain.

Wells customers have filed a class action against the company, claiming that its auto insurance program was a scam. Rep. Jeb Hensarling, the chairman of the House Financial Services Committee, meanwhile, told Bloomberg News last week that he plans to question the bank and its regulators.

One key complaint among consumer advocates is that, particularly in states where insurance and banking regulators are separate entities, scrutiny of lender-placed auto insurance has fallen through the cracks.

For instance, regulators do not track placement rates for lender-placed auto policies, according to Birnbaum at the Center for Economic Justice. Such a figure could provide a red flag about whether an unusually high number of borrowers are being enrolled in and charged for coverage.

Beside the investigations being conducted by state regulators, the Federal Reserve, the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau have begun looking into problems with Wells’ so-called GAP insurance program, according to media reports Tuesday.

GAP, or guaranteed auto protection, is optional insurance that covers the difference between what consumers owe on their auto loans and the value of the coverage that an insurer will provide if a car is destroyed or stolen.

“Nothing motivates state regulators more than when the federal government gets interested in something,” Hunter said.

The problems at Wells, though, should not overshadow the fact that lender-placed auto insurance, in particular, still has an important role to play in the industry, according to Wallan, the attorney from Pillsbury. But the legal risks of running the business are nonetheless high.

“My general view — and this comes from a guy who sues insurance companies — is that there’s nothing by its nature” improper about lender-placed auto insurance, Wallan said. “You just need to run it the right way.”

Kristin Broughton

Kristin Broughton

Kristin Broughton is a reporter for American Banker, where she writes about the business of national and regional banking.