Wells Fargo is now finding themselves in hot water over the recent reports that they charged over 570,000 customers for car insurance they didn’t want or need, costing consumers up to $80 million and even causing some to default on their auto loans. An internal report intended for the bank’s executives and obtained by the New York Times found, among other things, that the bank admitted to applying forced insurance for those customers without informing them. Is this okay? Definitely not, but there are a number of factors at play, so we’ll lay them all out in black and white.
For many people, this is the first they are hearing about a bank forcing insurance coverage on a customer’s auto loan. However, forced insurance coverage is not new or illegal when it comes to banks requiring that drivers with auto loans carry a certain level of insurance coverage.
What is unsavory, and in some cases illegal, about the Wells Fargo situation is the way the bank handled the process of adding insurance coverage to existing auto loans. For a better understanding let’s first discuss why banks require insurance when they issue an auto loan and what course of action they are allowed to take if they find out a vehicle they’re financing becomes uninsured.
Do Banks Require Insurance When Issuing an Auto Loan?
First, consumers have options when they buy a car. They can shop around for the best financing rates themselves, asking any number of banks or credit unions to issue their car loan. They can also go through this process with the dealer, who will essentially reach out to a network of banks and financial institutions and collect bids from lenders.
What does this mean for consumers? Even if they don’t walk into a Wells Fargo to set up an auto loan, they may end up with a Wells Fargo loan by working through their car dealership. Although the dealership will handle the original financial agreement, the borrower will ultimately make their car payments to Wells Fargo.
What’s important to remember, though, is that there is a bank backing every auto loan, whether you go through the financing process at a dealership or on your own.
And yes, nearly every bank will require that you carry a certain level of car insurance on a vehicle they are financing in order to protect their investment – that is, unless or until you pay the car off entirely. (This is why most insurance companies ask if you own, finance, or lease your vehicle since leased and financed cars will almost always require comprehensive and collision coverage.)
Why Do Banks Require You to Carry Full Coverage on a Financed Vehicle?
Banks require borrowers to maintain comprehensive and collision insurance (collectively called “full coverage“) until the loan is paid in full because the vehicle being financed is the bank’s asset. Requiring insurance on a financed vehicle also protects the borrower from having to pay back the full balance of the loan without help from an insurance company. So if the car is damaged or totaled, your insurance coverage should pay for most, if not all, of the remaining loan balance.
It’s important to note that insurance companies cover vehicles on an actual cash value basis, which is the value of the vehicle minus depreciation. Therefore, the value of your car could be less than the remaining balance of your loan, which was for the car’s current market value when you bought it. In this situation, guaranteed auto protection or GAP insurance helps to cover the difference between what your insurance company pays for the vehicle and what you still owe on the loan.
If a borrower totaled their vehicle and didn’t have insurance coverage, then the bank would have to sue the borrower for the remaining balance of the loan. This is much more difficult and costly for a bank than requiring insurance in the first place.
How Banks Protect Themselves If Your Insurance Cancels on a Financed Vehicle
Most banks have two options to protect themselves against a situation in which a borrower totals their vehicle without insurance before the balance of the loan is paid off:
- A bank may “call” a loan if they receive notice that the vehicle you are financing through them becomes uninsured. This basically means that your entire loan balance becomes due within 60-90 days. If you don’t pay the balance by the end of the required period then the bank may repossess your vehicle and sell it to cover the loan balance.
- A bank can add “forced insurance coverage” on the financed vehicle. This means the bank takes out a policy that covers damage to the vehicle and they add the cost (that is, your premium) to your monthly loan payment. Force-placed insurance protects the bank and not the borrower in the event your vehicle is totaled because, even if the ACV of your vehicle is more than what you owe to the bank, the policy covers only the remaining loan balance and you lose any equity in the vehicle. This type of coverage is almost always significantly more expensive than a traditional auto policy and serves to incentivize the borrower to purchase coverage on their own. It is also important to note that forced insurance coverage does not provide liability or any state-required coverage, so you could be ticketed for driving uninsured if you were to be pulled over in a traffic stop.
You legally have to have car insurance to drive in the U.S., and insurance offers you substantial financial protection. And now we’ve seen why banks require certain coverage limits. However, with any bank, you should be able to get the required insurance coverage on your own and simply show proof of coverage to the bank.
The question at hand in the case of Wells Fargo, however, is why the bank didn’t accept that proof, and opted instead to charge consumers for coverage they already had.
So, can your bank force insurance coverage on you?
- If you are financing a vehicle and maintain an insurance policy that includes comprehensive and collision coverage with the deductibles that the bank requires: No, the bank cannot add insurance coverage and charge you for it. You simply need to show proof of your coverage to the bank.
- You are financing a vehicle with a bank and your insurance company cancels your policy or you let the policy lapse, leaving your car without comprehensive and collision coverage: Yes, your bank can apply “forced coverage” in the name of protecting their investment.
The practice of forced insurance coverage helps to protect banks, but this only happens when they are notified of, or find out that, the insurance on a financed vehicle has lapsed or been canceled.
Just as with states that actively monitor whether registered vehicles are also in compliance with state insurance laws, banks that are aware of a lapse in coverage will send a notice to the borrower asking for proof that the vehicle is insured. Banks generally don’t apply forced insurance coverage until after they’ve issued a notice to the borrower of the additional insurance cost on their monthly car payment. That doesn’t appear to be the case with Wells Fargo.
The Wells Fargo Issue
It seems Wells Fargo failed to check or completely ignored the insurance status of customers who had auto loans with them and added the cost of the forced coverage to their monthly loan bills anyway without notifying the customers.
The added insurance cost led thousands of their customers into defaulting on their loans and repossession of their vehicles, even when those customers already had their own insurance coverage in place. Many of the affected customers were not even aware that they were being charged an additional amount, which caused overdrawn accounts for a significant number of people.
At least one customer who noticed the added cost notified Wells Fargo that he did, in fact, have existing insurance coverage on his vehicle. Rather than refund and remove the forced insurance, Wells Fargo continued to charge this customer for the added coverage and charged a late fee.
So, How Can Consumers Protect Themselves Against Forced Insurance Coverage?
Wells Fargo has since promised to “make whole” the customers affected by the forced insurance errors. Unfortunately this may be a long process for some customers as their credit has been adversely affected and could take a significant length of time to completely reverse the damage already done. While this situation is unique and unlikely to be an ongoing issue, it’s important for consumers to protect themselves by being proactive. A few tips when financing a vehicle:
- Know your loan options before going to the dealership – Shopping around for a loan before you go to the dealership can often result in the lowest interest rate and best loan terms.
- Shop for insurance before going to the dealership – Insurance will almost always be required when financing a vehicle and comparing rates before buying the vehicle will help you determine a budget.
- Read and understand all of your paperwork before signing – This will help you avoid any surprises and will also tell you what to expect if you miss a payment, your insurance lapses, or you want to pay off the car early.
- Always stay up to date on your bills – If you notice a change in your monthly car payment, you should contact your lender immediately. If you fail to monitor the amount you’re paying each month, you could end up paying for something you don’t need or want.
As a licensed insurance agent, I recommend contacting your insurance provider before signing an auto loan agreement to ensure that your policy provides adequate coverage for the vehicle you’re buying. In addition to comprehensive and collision coverage, most lenders also specify a deductible amount you must have on your policy to comply with their requirement, and failing to have the right deductible could result in not being able to take the vehicle home until you do. Working with an agent will help to make the process smooth and simple. Plus, they can send your insurance paperwork directly to the dealership and lender right away, meaning you will have proof of insurance on hand immediately.
If you find that you are paying for excessive coverage or aren’t happy with the handling of your auto loan, consider contacting the Consumer Financial Protection Bureau to help remedy your situation. This group sends consumer complaints directly to financial institutions and boasts a 97% response rate to those complaints. Being diligent is the best way to avoid overpaying or being gouged for unnecessary features when it comes to financing a vehicle, but it’s important to know that there is help available if your lender is doing something shady. And on the insurance side, you can always ask me.