Editor's Note: TIADA received the Following comment from Berkshire Risk Services.

If you haven’t been vacationing on Mars or napping under a rock, you’ve probably heard that Wells Fargo is in trouble again, this time for mismanaging its Collateral Protection Insurance program. As CPI wonks, those of us at Berkshire Risk have been following the story closely. Here are our initial observations.

The Wells’ CPI program was (the bank discontinued it in late 2016) a traditional financial institution model, driven by outsource insurance tracking provided by the CPI insurer, National General. Annual CPI certificates were charged in-full to the bank at the time of placement and corresponding debits were charged to customer accounts, increasing the unpaid balance and accrued interest. In response to consumer complaints, the bank conducted an audit and found several thousand instances of “false placements,” caused by a failure to document evidence of insurance provided by Wells’ customers. The bank had added and charged for CPI when it shouldn’t have and left the charges in place after receiving evidence of insurance from its customers. The impact on affected customers was compounded by the annual CPI premium and interest accrual that increased delinquencies and may have contributed to as many as 20,000 -25,000 repossessions.

Although the insurance tracking was administered by the CPI insurer, it is not yet clear whether the breakdown occurred in the insurer’s operation or inside the bank. It is possible that it occurred in both locations.

In the states of AR, MI, MS, TN and WA, either the bank or the insurer may have failed to mail the required disclosure letters.

The Takeaway

First, we should acknowledge that the attention paid to the Wells Fargo story is as much about the bank’s enormous size and prior sins as it is about poor CPI controls. Nonetheless, if the reporting is accurate, the CPI process did fail and that failure suggests a few cautionary comments:

• CPI is always the insurance of second resort. Even if everyone - customer included – prefers CPI, the creditor is obligated to look first to the customer’s own personal auto insurance before placing CPI.

• Insurance document control and response is critical. Because CPI may be added only in the absence of customer insurance, creditors using CPI must have a reliable process for identifying and responding to changes in customer insurance status. The process should include a mechanism for documenting customer inquiries and complaints, as well as an escalation procedure to elevate serious complaints to the attention of management. In other words, if the wheels are coming off, customer complaints can be the best early indicator. If tracking is outsourced, the tracking company should be required to demonstrate adequate document controls.

• The rules vary from state to state. TIADA members are lucky, in that Texas has a CPI statute (Tex. Fin. Code §307.001 et seq.) that takes the guesswork out of compliance. The statute defines exactly what CPI is under Texas law, when and how creditors may use the insurance, the content and timing of mandatory consumer notices and allowable charges to consumers.

For BHPH dealers and finance companies who are more concerned with directives of the OCCC than TDI, note that the OCCC expressly mandates compliance with the CPI statute. 7 Tex. Admin. Code §84.305.

Thanks to Wells Fargo, we can expect increased scrutiny of CPI in general. There is no cause for panic, but this is a good time for attention to the rules. If you are using CPI, talk to your provider. Ask them to confirm and document compliance with Texas law. If your provider also tracks insurance for you, request a review of their internal controls and document management processes. And if you are tracking insurance in-house, ask the same questions of yourself and answer honestly.

If you have any questions about CPI please call or email Chris Kirwan or Bob Henderson.

Chis Kirwan
ckirwan@berkshirerisk.com
913-433-7001

Bob Henderson
bhenderson@berkshirerisk.com
913-433-7004

Editor's Note: TIADA received the following comment from Assured Vehicle Protection

In Texas Collateral Protection Insurance “CPI”, is a forced placed insurance product. CPI is NOT a point of sale insurance product. CPI may be forced placed by the Creditor only after the effective date of the retail installment contract inclusive of proper disclosures and the retail buyer has failed to provide evidence of insurance. Once CPI is placed, proper and timely notices to the Creditor must occur. Disclosures forms must be consistent be with Texas Code and the filed policy of the CPI provider. Dealers should be cautious of “self made forms” that may not be in compliance and that all notices and disclosures are being provided timely. Administration of the program in compliance with Texas codes is fundamental to the success of any CPI program