Wells Fargo Sued Over Alleged Full-Year Hazard Insurance Charges for Homes Redeemed After Foreclosure

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Five Kansas residents allege Wells Fargo Bank, N.A. has for years wrongfully charged those who have redeemed their homes following foreclosure sales for a full year of hazard insurance even though only a small fraction of the insurance is typically used. 

In these situations, Wells Fargo will then seek reimbursement for the unused hazard insurance, the 25-page proposed class action claims, alleging the bank is unjustly enriching itself and misleading vulnerable homeowners attempting to recover their homes from the bank. 

In Kansas and a number of other states, homeowners who are foreclosed upon and lose their homes have the statutory right to “redeem” their properties, or essentially buy back their homes from a purchaser, typically a lending bank, within a specified period of time, the lawsuit begins. According to the suit, redemptions in Kansas occur within either three months of a foreclosure sale or 12 months after the sale, depending on the percentage of the original loan balance that remains outstanding. If a borrower has paid less than one-third of their original mortgage balance, the redemption period is three months; if they’ve paid more than one-third, the period is 12 months, per the complaint.

To redeem their property, homeowners must pay a sum equal to the sale price the property brought at a foreclosure sale in addition to certain costs incurred by the purchaser, i.e. the bank, “[d]uring the period allowed for redemption,” the case says. These costs can include “taxes on the lands sold, insurance premiums on the improvements thereon, other sums necessary to prevent waste,” and other reimbursable expenses, such as hazard insurance, the lawsuit relays. 

According to the suit, when Wells Fargo, as a foreclosing bank, is the successful bidder at a foreclosure sale, the bank will sometimes purchase hazard insurance to protect the property. Per the complaint, Wells Fargo will typically buy hazard coverage for a full year even though the option exists to purchase insurance for shorter periods of time, such as one month.

When redemption of a home is imminent, Wells Fargo’s outside counsel will prepare a redemption payoff statement, at which time the bank’s counsel has the opportunity to prorate the hazard insurance amount, the lawsuit states. Despite the fact that “virtually all expenses in typical real estate closings (including redemption closings) are prorated,” Wells Fargo and its counsel choose another course, and instead “willfully and intentionally decide” to not prorate hazard insurance costs, or even disclose that the redemption payoff amount includes the cost of hazard insurance for a full year, the lawsuit alleges. 

“Therefore, in redemptions in which Wells Fargo has purchased a full year of insurance, the redeeming homeowner is unwittingly charged that entire cost as part of the redemption even when the redemption occurs less than 12 months after the foreclosure,” the suit contests. 

After a home has been redeemed, an insurance company will most likely reimburse Wells Fargo for the portion of the hazard insurance that went unused, yet Wells Fargo, the case goes on to claim, does not return the funds it is reimbursed to redeeming homeowners. Instead, the bank keeps these funds as “an undeserved windfall” despite the fact that the money, potentially thousands of dollars per year, is “unearned, fraudulently obtained, and rightfully belong[s]” to the homeowners, the lawsuit alleges.

The lawsuit seeks to represent those in the United States who redeemed a property purchased in foreclosure by Wells Fargo and, in connection with that redemption, reimbursed Wells Fargo for property insurance premiums that were not prorated to reflect the period of ownership held by Wells Fargo, with a Kansas-only subclass also proposed. 

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