The lawsuit says execs knew as far back as 2002 about the issues with the program.
Photo: Justin Sullivan (Getty)

A couple weeks back, news broke that Wells Fargo execs had been accused in a lawsuit of being well aware—since at least 2012—that the bank was improperly charging thousands of customers for auto insurance they didn’t need. We covered the story earlier this month, but after finally getting through the 111-page complaint unsealed by a federal judge, it’s worth peeling off some of the particularly glaring excerpts to underscore, if the claims are true, the bank’s scummy conduct here.

A quick recap: In the summer of 2017, Wells came clean—in response to a report from The New York Times—that it had forced around 800,000 people to pay for insurance they didn’t need to go with their car loans. The problems with forcing customers to buy “collateral protection insurance,” or CPI, that they didn’t need were obvious. More than 25,000 people, for example, had their car wrongly repossessed.

(CPI covers damage to the insured vehicle, and Wells happened to be the only major bank to force customers to buy the insurance, if it found the customer didn’t have any policy.)

Wells launched efforts to reimburse customers, following the Times report, and said that an earlier review of the CPI program in 2016 uncovered enough problems to suspend it altogether later that year. The eventually coughed up $1 billion to settle claims brought by the feds, but the federal lawsuit filed by customers impacted by the scandal asks for additional remediation efforts to address the fallout of the bogus charges.

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A Wells spokesperson declined to comment on the suit, but in a statement, the company said: “Wells Fargo Dealer Services discontinued its CPI program in September 2016. Since then, we have been reviewing customer accounts and developing a remediation plan—which we hope to finalize very soon—to provide impacted customers with the compensation they deserve.”

But the plaintiffs’ complaint offers some compelling evidence that Wells execs knew—or at the very least should’ve known—something was wrong with the CPI program much earlier.

The CPI Program Lasted From 2002 to 2016

As we reported last year, the force-placed insurance policy began in 2006, and Wells internal audit reported that somewhere between 570,000 to 800,000 customers were impacted by the scandal.

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But the lawsuit found that Wells and the insurance company, National General Insurance, had a relationship that actually went back as far as 2002, raising the prospect that “millions” of customers faced unlawful charges, the lawsuit alleges.

During that time period, Wells Fargo and its predecessors forced-placed CPI on millions of auto loan borrowers, even when borrowers maintained sufficient insurance to protect Wells Fargo’s collateral.

Numerous internal documents outline that, despite the overlap of multiple subsidiaries acquired by Wells Fargo and National General since 2002, both companies outright stated that the CPI relationship dates to that year.

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From the suit:

Wells Fargo’s internal documents confirm that this change did not materially change the operation or administration of the CPI Program. For example, an internal Wells Fargo presentation entitled “CPI Update: Collateral Protection Insurance” from April 2016 explains that the relationship between Wells Fargo and National General dated to 2002, and states that “National General is formerly known as QBE and Balboa [two National General subsidiaries linked to the program].”

‘Kickbacks’ Through ‘Unearned Commissions’

This part is a tad complicated, thanks to the unwieldy corporate structure of both Wells and National General. Back in March 2002, the lawsuit alleges, the original CPI agreement was signed between WestFin (a Wells Fargo subsidiary) and Meritplan and Balboa (both subsidiaries of National General).

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Legally, the complaint says, WestFin was an insurance agent, meaning it sold insurance polices and was allowed to “collect a commission on the net written premium for CPI placed on individual borrowers’ accounts.” This was key, the complaint alleges: Wells Fargo, as a bank, couldn’t “legally receive a commission on CPI.”

Insurance companies—like Meritplan and Balboa—pay commissions to licensed agents to compensate those agents for “actual services performed,” the complaint says, “even those affiliated with commercial lenders.” This includes promoting the insurance product, collecting premiums, and then forwarding the premiums to the insurer.

Got that? So Wells’ subsidiary, an insurance agent working on behalf of the bank, sold insurance policies to the bank itself on behalf of Meritplan and Balboa.

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The original 2002 agreement stipulated that WestFin’s primary responsibility was to produce insurance business for Meritplan and Balboa, but that never happened, according to the complaint.

Instead, WestFin was merely there to collect unearned commissions. WestFin received commissions from the CPI Vendor on every CPI policy placed on individual borrowers’ accounts, despite the fact that it did not perform any work traditionally associated with an insurance agent. The traditional role of an insurance agent is to assist the policyholder in determining her insurance needs, shopping the market for the insurance product that meets the policyholder’s needs, and seeking the most competitive price for the product. WestFin did not perform any of these functions.

The complaint goes on:

In reality, and unbeknownst to customers, Wells Fargo’s internal documents reveal that “Commissions are obtained as part of the [Wells Fargo] CPI program with [National General] in order to offset the expenses WFDS incurs as a result of the program.”

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The commissions earned by WestFin were then booked as revenue for the bank, the lawsuit says.

It Earned Wells a Decent Chunk of Change

By force-placing auto insurance on 2.9 million customers between 2005 and 2016, the complaint alleges, the arrangement netted Wells significant profit, as well.

Between October 2005 and 2017, the CPI Program generated more than $72 million in commissions and more than $71 million in interest on force-placed CPI premiums for Wells Fargo. On information and belief, Wells Fargo generated tens of millions of dollars in late fees, NSF fees, repossession fees, reinstatement fees, and other charges in connection with the CPI program.

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This Seems Bad

Through the various subsidiaries owned by Wells and National General, the plaintiffs allege Wells paid itself another form of a kickback through a cleverly designed scheme.

From October 2005 and February 2013, the complaint says, WestFin received a 17.3 percent commission of the net written premium, for every CPI policy placed on an individual borrowers’ account. That ended in February 2013, after Wells and the National General subsidiary agreed to terminate the commission that was paid to WestFin.

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You’d think this would lower the cost of CPI for customers subjected to it. Not so, the complaint says:

However, as described below, Wells Fargo deliberately chose not to pass on the full savings from the elimination of the commission to its customers. Instead, Wells Fargo retained a portion of that money, in essence pocketing another kickback.

At that point on, WestFin was selling polices without receiving a commission. Weird.

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While all this was going on, the bank paid a fee to National General’s predecessor for something called Tracking Services, which in theory made sure the Wells customers’ maintained sufficient insurance coverage. (This process, of course, suffered a disastrous flaw by mistakenly finding customers needed CPI when that was never the case.)

So, when Wells Fargo eliminated the commission to WestFin, the complaint says, rather than passing on the savings to the customer, Wells allegedly decided to just use it to pay for Tracking Services:

While the elimination of the commission also reduced the CPI premium, not all of that savings was passed on to the borrower. As Dawn Martin Harp, Head of Wells Fargo Dealer Services explained, “an alternative to reducing the 17.3 [percent commission] entirely is to offset a portion of that to pay for tracking and [have] the remaining go to the customer.”

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The complaint goes on:

Consistent with Ms. Harp’s statement, an internal Wells Fargo presentation from July 2012 explained that rather than pass to the customer the full savings from the 16 elimination of the commission, the bank would instead “[e]liminate commission and split 17 savings between consumer and WFDS.”

So awesome.

CPI premiums weren’t reduced by 17.3 percent, the complaint says, and instead dropped in 2013 to only 10.7 percent—while Wells allegedly pocketed the remaining 6.6 percent, “amounting to another kickback,” the complaint says.

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Wells Structured CPI Payments to Have Priority in Loans

When you pay your auto loan bill each month, whichever bank holds your note applies that payment to certain things, like the interest and premium.

Wells, the complaint said, prioritized the CPI payment, which allowed it to “maximize the interest customers paid on CPI over the life of their automobile loan.”

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Here’s how it was structured, from the complaint:

As a result, the complaint says, structuring the payments this way “had the predictable effect of increasing the overall interest customers paid to Wells Fargo on their loans, because less of their payment went to the actual outstanding loan principal each month.”

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CPI ‘Disproportionately’ Affected Subprime Borrowers

This almost feels expected, but the agreement between Wells and the CPI provider apparently stipulated five groups of car buyers that were exempt from the program. One sub-group included “super prime loans, Tesla customers, and loans with balances greater than $75,000.”

By “deliberately” excluding those borrowers, Wells instead chose to “target subprime borrowers aggressively, because their high interest rates and greater likelihood of delinquencies translated into more revenue for the bank,” the complaint alleges.

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One National General executive allegedly explained at some point, rather manner-of-factly, that:

Wells Fargo was “financing car loans from 0% to 29.99%. Considering they were adding a finance charge to the loans, that would be killer to have a loan at 18.99%, then add the CPI insurance to the car payments across 8 payments and the Finance Charge.

Yeah, absolutely killer.

An internal Wells Fargo presentation from February 2016 also noted that subprime borrowers were “10 times more likely” to receive force-placed CPI.

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Wells Knew It Had Other Options

The bank knew it was the only major lender to rely on a CPI program for auto loans, and it knew it had other options, such as self-insuring buyers, the complaint says:

According to an internal WellsFargo presentation entitled “CPI—Program Review Executive Summary” dated August 25, 2016, “WFDS is the only large auto finance company with a CPI program.” Similarly, in an internal Wells Fargo email dated January 7, 2016, a member of Wells Fargo’s operational risk team acknowledged that “none of the big banks or captives force place at the customer 12 level. We are a 55 billion dollar portfolio … we should be able to self-insure!!”

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And:

While self-insuring would have been far more efficient, Wells Fargo chose not to self-insure because doing so would have cost it money. Instead, Wells Fargo kept the CPI Program in place to obtain lucrative kickbacks in the form of unearned commissions and other compensation, inflated interest charges, and other fees and charges for late payments, insufficient funds, and the like, all of which went straight to the bottom line as essentially pure profit.

Wells Knew Its Billing Statements Were Deceptive

According to the complaint, the way the arrangement between Wells and its CPI vendor worked by like this: the CPI Vendor billed Wells for force-placing the CPI insurance on a customers account. Wells then added CPI interest and premium charges to their account 100 days after the borrower appeared in the vendor’s system as having expired or canceled insurance.

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Except, for whatever reason, Wells never notified customers throughout the duration of the program—from March 2002 until it ended in September 2016—that they were paying for a CPI policy, the complaint says.

What’s more, Wells now allegedly acknowledges this amounted to outright deception

Per the complaint, Wells wrote in an internal August 2015 audit:

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One of the bank’s main witnesses in the case said they believed the billing practice had been deceptive, the complaint says.

Credit Reports Remained Flawed

I’ll end with this one, because it seems like the most obvious example of how abhorrent scandals like this can have lasting effects, even after the bank has paid a massive fine.

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The complaint alleges that, when a customer tried to cancel their CPI policy if they obtained necessary coverage, they fell into two categories: “flat cancels” (they should receive a full refund), and “partial cancels” (a borrower who submits proof they had adequate insurance for only a portion of the time Wells wrongly believed they did not).

Between January and May 2016, National General found that 88,000 CPI policies were “flat-cancelled” due to “duplicative coverage,” just in that short timeframe alone.

That, however, didn’t stop the problems for those borrowers, according to the complaint says (emphasis in the lawsuit):

But cancellation did not end the harm to borrowers. In January 2016, a Wells Fargo operational risk review revealed that borrowers who flat cancelled their force-placed CPI after having a CPI-related delinquency reported to the credit bureaus were unable to remove that delinquency. “If the policy is flat cancelled, there is no process in place to remove the delinquency from the bureaus. Probably one of the biggest complaints! And keep in mind, there is an extremely high percentage of premiums that eventually get flat cancelled.” [Emphasis added.] This practice had been in place and harming borrowers since inception of the CPI Program in 2002.

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There’s much, much more in the lawsuit, which you can read in its entirety below.