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Wells Fargo's GAP refund problem offers a lesson

Wells Fargo found itself in hot water again last week for possibly neglecting to refund consumers' guaranteed asset protection payments after they paid off their auto loans. But there are two sides to every story, and in this case, the law isn't as clear as it seems.

The Federal Reserve Bank of San Francisco filed an inquiry into Wells Fargo's GAP refund practices last week, The New York Times reported. In a filing with the Securities and Exchange Commission this month, Wells Fargo said it had "identified certain issues related to the unused portion of guaranteed auto protection waiver or insurance agreements between the dealer and, by assignment, the lender, which may result in refunds to customers in certain states."

A Wells Fargo spokeswoman told The Times: "During an internal review, we discovered issues related to a lack of oversight and controls surrounding the administration of Guaranteed Asset Protection products. We are reviewing our practices and actively working with our dealers and have already begun making improvements to the GAP refund process. If we find customer impacts, we will make customers whole."

The GAP administrator, dealership and lender likely owe parts of that refund, not just the lender, said Tim Meenan, executive director of GAP Alliance, which represents providers of GAP coverage.

GAP could be sold for $500 to $1,000, but "The question becomes, who provides the rebate?" said Ken Rojc, managing partner of Nisen & Elliott's automotive finance group. In some states, the lender is responsible for making the payment or ensuring that the payment has been made, he said.

But many states require the customer to request the GAP refund, Meenan said. If a state statute says a consumer must request a refund, but actions such as the Federal Reserve inquiry prove otherwise, the lender could be caught between a state statute and federal regulators.

"I think it's safe to say we have entered a period where you have to think about both a federal regulator and a state regulator in these product spaces. The federal regulators don't have an obligation to provide guidance in advance but reserve the right to take regulatory action against you," Meenan said.

F&I products are already under regulatory scrutiny, but cases like this could draw the Consumer Financial Protection Bureau or state attorneys general into the space even more, Rojc said.

Now is an important time for auto lenders to be sure their GAP refund process is working correctly and in a timely manner, Rojc said.

To steer clear of regulators, maybe other lenders should follow Wells Fargo's lead and review their internal refund policies. If the legal line is fuzzy, lenders had better stay way to the right side of it.

You can reach Hannah Lutz at -- Follow Hannah on Twitter: @hm_lutz

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