Wells Fargo fined $1 billion for ‘unfair’ insurance practices — how to avoid being oversold

Some car owners have been paying much more than they need to — sometimes leading to losing their vehicles entirely.

Wells Fargo WFC, -0.19%   was ordered to pay a $1 billion fine by the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, partly for the way it required consumers to purchase insurance while taking out auto loans. The fine also applied to some other missteps, including the way it charged borrowers for mortgage interest. The organizations settled on April 20. Some of the confusing insurance practices Wells Fargo used resulted in some consumers having their cars repossessed.

Wells Fargo estimates that it will provide approximately $145 million in cash remediation and $37 million in account adjustments, after the incident, according to a company spokeswoman.

Here’s what happened — and how you can avoid the same fate:

What happened at Wells Fargo

Some consumers who financed their cars through Wells Fargo suddenly saw their monthly payments rise significantly. Representatives from Wells Fargo told them it was because of an insurance charge.

Here’s what was really happening:

When consumers buy a vehicle through a lender, the lender often requires the consumer to also purchase “collateral protection insurance.” That means the vehicle itself is collateral — or essentially, could be repossessed — if the loan is not paid.

Individual lenders, as well as states, have their own rules on how much insurance customers need to buy, said Maxime Reiman, the head of insurance research at ValuePenguin, a personal-finance website.

Sometimes, the fine print of their contracts say that if borrowers do not buy their own insurance (enough to satisfy the terms of the loan), the lender will go out and purchase that insurance on their behalf, and charge them for it, Reiman said.

See also: Richard Thaler, Nobel Prize-winning economist, says Wells Fargo is ‘slimy’

That is a legal practice. But in the case of Wells Fargo, borrowers said they actually did buy that insurance, and Wells Fargo still bought more insurance on their behalf and charged them for it.

How to avoid the same situation

1. Don’t just take the first loan you’re given

American drivers haggle over the price of cars, but they don’t shop around for the best rates on auto loans. A majority of consumers don’t shop around for loans at all, and 80% don’t get a loan with the lowest available interest rate, according to a study from MIT’s Sloan School of Management and Brigham Young University’s Marriott School of Business. The average interest rate for a 60-month loan for a new car is 4.57%, according to the personal-finance company Bankrate.

The same principle applies to collateral protection insurance, Reiman said. Although some lenders will offer to buy that insurance for you, when you shop around yourself, you’re likely to find a better rate, she said.

2. Make a checklist of exactly what coverage you need

To avoid paying more than you need to, make a physical checklist of what your state requires and what your lender requires, Reiman said.

Typically, a lender will give a borrower some requirements for the loan.

And every state has its own rules about what kind of insurance drivers are required to have. What if, during the purchasing process, the lender or another party tries to sell you more insurance on top of what’s required by the state and the lender? That’s a red flag, Reiman said. You can find out the requirements on the state’s government website, such as the state’s Department of Motor Vehicles site.

3. Look up any unfamiliar terms and beware of jargon

Some lenders will use the exact term “collateral protection insurance,” and some might simply call it “insurance” or use other terms, Reiman said.

Ask exactly what each term means. “If you take the time to ask, it will clear up a lot of confusion,” Reiman said.

“Comprehensive cover,” for example, on an auto insurance policy, is the highest level of car insurance coverage. It typically covers drivers for injuries to other people and others’ property, damage to one’s own vehicle, medical expenses up to a certain limit and fire damage or theft.

Wells Fargo has apologized for overselling loans

In 2017, the bank apologized for “any harm” caused to its auto loan customers.

For the roughly 2 million borrowers forced into these insurance plans since 2005, many plans were unnecessary, according to the bank’s own audits. When some customers showed the bank proof they had their own insurance, the bank still kept the forced-placed policies on accounts or didn’t refund the premiums, or related fees and charges, including repossession fees.

A large number of consumers even had their vehicle repossessed because of this. For at least 27,000 customers between 2011 and 2016, the additional costs of the insurance could have contributed to a default that resulted in the repossession of their vehicle, the Consumer Financial Protection Bureau said.

“We take full responsibility for our failure to appropriately manage the (collateral protection insurance) program and are extremely sorry for any harm this caused our customers,” said Franklin Codel, the head of Wells Fargo Consumer Lending.

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