Wells Fargo & Co. has agreed to pay at least $386 million to settle a 2017 class-action lawsuit addressing its auto collateral-protection insurance practices.
The settlement was reached Thursday in U.S. District Court for the Central District of California.
The amount is more than six times the $64 million that Wells Fargo initially agreed to pay in July 2017 to settle the lawsuit.
"As this litigation has shown, Wells Fargo's 2017 remediation plan was woefully inadequate and ultimately represented only a fraction of the benefit the settlement confers on customers," according to the filing.
According to the Financial Web website, collateral-protection insurance is defined as a policy that protects auto-loan lenders from financial losses resulting from having to pay claims when the vehicle owner does not have auto insurance.
CPI allows lenders to cover the claims without losing any money. In most cases, the insurance cost is built into the borrower's loan, sometimes without the borrower's knowledge, as it appears may have been the case with Wells Fargo customers.
A preliminary approval hearing for the settlement is set for July 9, and a settlement fairness hearing for Oct. 28.
If approved by a federal judge, it would mean Wells Fargo has agreed to pay more than $4 billion to settle various regulatory disputes, including $2.09 billion announced in August, $1 billion announced in April and $575 million in December.
To put those fines into perspective, the bank had net income of $5.86 billion in just the first quarter of fiscal 2019.
National General Insurance Co. agreed to pay $7.5 million for its role with the products. Both parties have denied wrongdoing.
The settlement was made to "resolve claims that defendants engaged in an unlawful scheme to force (tens of) millions of Wells Fargo auto loan customers to pay for unnecessary and unwanted collateral protection insurance."
The class-action period is Oct. 15, 2005, to Sept. 30, 2016 — the latter date being a couple of weeks after Wells Fargo's fraudulent customer-account scandal surfaced that has affected at least 3.5 million retail customers.
"This settlement is the result of contentious, prolonged, arm's length negotiations between the parties" which participated in five mediation sessions between May 2018 and March.
Wells Fargo said in a statement that "reaching this agreement, which leverages remedies available in our existing remediation plan, is an important step in making things right for customers impacted by this issue."
Settlement class members would receive reimbursement of the fees they paid, plus interest, while the auto collateral-protection insurance (CPI) was in effect. They will not be required to submit a claim form.
Named class participants will get up to $7,500 in a service award. The plaintiffs' attorneys will receive up to $36 million.
According to the complaint, Wells Fargo was accused of causing nearly 275,000 customers to become delinquent on their auto loans, and about 25,000 vehicles to be illegally repossessed.
Certain class members whose vehicle was repossessed during the class period will receive $4,000 in compensation and a refund of the repossession costs.
"We will continue sending individualized letters to customers that clearly set out the remediation amount due to them, as well as a check for that amount," Wells Fargo said. "This process will continue until the remediation is complete.”
The settlement said the scheme worked like this:
Wells Fargo would purchase CPI from National General or its predecessors, and then force-place the insurance on auto loan borrowers' accounts.
Force-placed insurance — also known as creditor-placed, lender-placed and CPI — is defined by the N.Y. Insurance Department as a policy placed by a lender, bank or loan servicer when the property owners" own insurance is cancelled, has lapsed or is deemed insufficient, and the borrower does not secure a replacement.
Wells Fargo would assess a full year's worth of CPI charges against the borrower's account, and then charge monthly interest on the premium before applying payments to a customer's principal loan balance.
That payment mechanism, according to the filing, ensured that the bank was paid for the CPI charges first, which left some customers delinquent on their auto loan payment.
There also was an unearned commission tacked onto the costs bore by customers.
"These kickbacks ensured that the CPI charges to Wells Fargo's borrowers were more expensive than the premiums for coverage borrowers could have, and often did, obtain on their own," according to the filing.
The scheme became public through investigative reporting by The New York Times in July 2017.
The bank responded in July 2017 by saying it would compensate affected customers, but only going back to 2012. It estimated 570,000 customers were affected, which is how it came up with the $64 million settlement offer.