Home / Business / Wells Fargo fined $ 1 billion for "unfair" insurance practices – how to avoid being oversold

Wells Fargo fined $ 1 billion for "unfair" insurance practices – how to avoid being oversold

Some car owners have paid far more than they need – which sometimes results in them losing their vehicles completely.

Wells Fargo

WFC, -0.19%

was sentenced to pay a $ 1 billion fine by the Consumer Protection Bureau and the Office of the Auditor of the Currency, partly because of the way How Consumers When Purchasing Needed Insurance From Car Loans. The fine also applied to several other missteps, including the way borrowers were charged for mortgage rates. The organizations have settled on April 20. Some of the confusing insurance practices that Wells Fargo has used have resulted in some consumers getting their cars back.

Wells Fargo estimates that there will be around $ 1

45 million in cash rebalancing and $ 37 million in account adjustments after the incident, according to a corporate spokeswoman.

Here's what happened – and how you can avoid the same fate: [19659006] What happened in Wells Fargo

Some consumers who financed their cars via Wells Fargo suddenly realized that their monthly payments were substantial rose. Wells Fargo representatives told them it was for an insurance fee.

Here's what really happened :

When consumers buy a vehicle through a lender, the lender often requires the consumer to buy "collateral protection insurance". This means that the vehicle itself is a security – or can essentially be repossessed – if the loan is not paid.

Both individual lenders and states have their own rules on how much insurance customers need to buy, said Maxime Reiman, 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 meet the terms of the loan), the lender will go out and buy that insurance for them, and charge them for it, Reiman said ,

See also: Richard Thaler, Nobel Laureate in Economics, says Wells Fargo is slimy

This is a legal practice. But in the case of Wells Fargo, the borrowers said they had actually bought the insurance, and Wells Fargo was still buying more insurance for them and charging them for it.

How to avoid the same situation

1. Do not just take the first loan you get

American drivers bargain for the price of cars, but they are not looking for the best rates for car loans. A majority of consumers do not buy loans at all, and 80% do not get loans with the lowest interest rate available, according to MIT's Sloan School of Management study 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 firm Bankrate.

The same principle applies to surety insurance, Reiman said. Although some lenders offer to buy this insurance for you, if you are shopping for yourself, you will probably find a better rate, she said.

2. Make a checklist exactly what cover you need

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

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 needed. What if the lender or other party tries to sell you more insurance during the buying process than is required by the state and the lender? That's a red flag, said Reiman. You can find out the requirements on the state government website, such as the State Department of Motor Vehicles.

3. Look for Unknown Terms and Beware of the Jargon

Some lenders will use the exact term "collateral protection insurance" and some would simply call it "insurance" or others Use terms, said Reiman.

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

"Comprehensive cover", for example for a car insurance, is the highest level of motor insurance. It usually includes drivers for injury to others and property of others, damage to their own vehicle, medical expenses up to a certain limit and fire damage or theft.

Wells Fargo has apologized for lending

In 2017, the bank apologized for "any damage" caused to its car loan customers.

For the approximately 2 million borrowers who were forced into these insurance plans since 2005, many plans were superfluous, according to the bank's own audits. If some clients believed that they had their own insurance, the bank did not retain the enforced policies on accounts or reimburse premiums or related fees and charges, including redemption fees.

A large number of consumers even had their vehicle therefore shifted back. For at least 27,000 customers between 2011 and 2016, the additional cost of the insurance would have contributed to a payment default that would have led to the repossession of their vehicle, the Consumer Protection Agency said.

"We take full responsibility for our failure to adequately manage the Collateral Protection Insurance program, and we are very sorry that our clients are harmed," said Franklin Codel, head of Wells Fargo Consumer Lending.

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