US Justice files fraud complaint against National General US Justice files fraud complaint against National General

National General Holdings Corp., which has a major operational hub in northwest Winston-Salem, is facing a U.S. Justice Department complaint about insurance fees charged on at least 655,000 vehicles financed through Wells Fargo & Co. loans.

The complaint, filed July 25 in the Western District of Pennsylvania, concerns the federal Financial Institutions Reform, Recovery and Enforcement Act. Defendants include three subsidiaries: National General Insurance Co.; National General Lender Services Inc.; and Newport Management Corp.

National General, based in New York, specializes in underwriting auto insurance. The insurer said in a statement that "these allegations are false, and we are committed to sharing the facts."

The local National General operation is based at 5630 University Parkway with about 1,200 employees, one of the city's top-10 private employers.

The complaint alleges National General violated the federal act by committing mail fraud, wire fraud and bank fraud. Justice requests the maximum penalty allowed under the act.

Justice claims the National General companies "erroneously force-placed its Collateral Protection Insurance (CPI) product on vehicles financed through Wells Fargo despite borrowers already having insurance through other carriers." The covered period is April 24, 2008, through Sept. 30, 2016.

Force-placed is an insurance policy placed by a lender, bank or loan servicer on property when the property owner's own insurance is cancelled, has lapsed, or is deemed insufficient, and the borrower does not secure a replacement policy.

According to the complaint, during the covered period "National General knew that it falsely force-placed insurance between 56% and 93% of the time."

Justice said among the effects from the CPI products were improper charges for late fees and interest, negative effects on credit scores, and improper repossession of some financed vehicles.

"The complaint alleges a long-running scheme to defraud hundreds of thousands of car buyers," U.S. Attorney Eric Olshan said.

"For years, these defendants saddled ordinary Americans, including residents of this district, with allegedly unnecessary insurance, leading to dire real-world consequences."

The details

Consumers financing a vehicle through Wells Fargo borrowed, on average, about $15,000 for mostly used, older vehicles.

The vehicles served as collateral for the loan. As a result, Wells Fargo required borrowers to obtain either comprehensive or collision insurance to protect the vehicle.

The premiums Wells Fargo borrowers paid for CPI force-placed by National General averaged nearly $1,100 per loan annually, or about $6,600 for a six-year auto loan. Once the customer was billed for the CPI, Wells Fargo paid National General the amount of the premium, less any refunds.

According to the complaint, during the covered period National General earned $489.5 million in net written premiums from borrowers for force-placed Wells Fargo CPI policies. National General earned an average annual premium of $1,124 per CPI policy during the covered period.

National General eventually refunded more than $1.5 billion in CPI premiums during the covered period that borrowers had paid for false placements.

Justice said National General allegedly received thousands of complaints from borrowers.

Justice claims the National General companies failed to accurately track whether cars financed by Wells Fargo had the requisite insurance coverage from an outside carrier.

In particular, the department alleges that National General's tracking efforts "were deficient for a variety of reasons," including that the companies:

• Repeatedly mailed letters seeking insurance information to borrowers at addresses that had previously been returned as undeliverable;

• Made no phone calls to insurance carriers, agents or borrowers to obtain outside insurance information, despite internal requirements to make a certain number of phone calls, and:

• Often failed to match insurance information in its possession to financed vehicles.

The companies "thereby knowingly or recklessly force-placed its own, much costlier Collateral Protection Insurance on vehicles that already had outside insurance," according to a news release.

"These premiums were generally more expensive than premiums for comprehensive and collision insurance that borrowers could buy on the open market, and CPI provided less protection for borrowers than comprehensive and collision insurance," according to the complaint.

"CPI protected Wells Fargo's interests, but it did not protect the borrowers who paid for it," according to the complaint.

Wells Fargo's role

A historic $1 billion penalty was assessed in April 2018 to Wells Fargo in consent orders involving the Consumer Financial Protection Bureau and the bank's federal regulator, the Office of the Comptroller of the Currency.

The penalty addresses regulatory claims that Wells Fargo violated the Consumer Financial Protection Act in certain auto loans and mortgage interest rate-lock extensions.

Regulators determined Wells Fargo "engaged in unsafe and unsound practices relating to improper placement and maintenance of collateral protection insurance policies on auto loan accounts and improper fees associated with interest rate lock extensions."

After Wells Fargo ended its CPI placement program in 2016, the OCC required the bank to remediate CPI customers for force-placed policies.

As of March 2020, Wells Fargo identified 1.06 million CPI policies across 943,500 accounts placed between 2005 and 2016 that were eligible for remediation. The bank paid an estimated $520.4 million to impacted customers.

Wells Fargo also identified more than 14,000 policies that National General should have canceled, but did not. Wells Fargo paid remediation to these customers of $16.1 million. Most of these borrowers had to wait years to receive refunds through the remediation process.

Wells Fargo also paid customers more than $71 million in its remediation process for late fees that accrued because of force-placed CPI policies.

Wells Fargo said in a statement Wednesday that it "has made things right for customers impacted by these legacy issues."

"Strengthening our risk and control infrastructure remains the top priority for the company and we are focused on continuing to make progress in this area."

[email protected]@rcraverWSJ