If Wells Fargo Calls To Offer You An Equity Loan On Your Car… Say No.

Over on the Credit Slips blog, Elizabeth Warren posted an email from a bankruptcy lawyer who was stunned at the horrible deal one of her clients got from Wells Fargo on an equity loan on a car.

Here’s the story:

Today I was interviewing one of my clients and she said that one of the loans she that she had should have been illegal. I asked her what she meant and she said that the loan she received should never have been permissible. Turns out she had a car loan with Volkswagen with an interest rate of about 3% and a loan balance of approximately $23,000.00 Because she had her home mortgage with Wells Fargo (or at least that is what she thinks is the reason) she received an offer from Wells Fargo for an equity loan on her car! (i.e. just like a home equity loan except the collateral is a car instead of a house) I had never heard of such a thing before. In any event, she agreed to do the deal with Wells Fargo (she needed to money to pay her bills and was much too embarrassed to go to family and friends) so she agreed to the refi and at closing she received $4850 in cash, Wells Fargo received $1300 in fees and the total amount of the debt went from $23,649 (the amount owed VW on the original car financing) to, hold on to your seats, $48,852! The interest rate on the new loan was a mere 16.24% (remember the old rate with VW was approximately 3%). Of course she defaulted and Wells Fargo repossessed the car and is now seeking its deficiency balance. Amazing to see an equity loan on a rapidly depreciating asset but when she received the loan Wells Fargo told her that she had paid down her car loan so quickly she had accumulated equity and they had a way to get the equity now.

The Wells Fargo loan was made in 2006 – the cost of the new financing was $17,900 – almost as much as the balance (i.e. $23,649) then due on the original note with VW. Also, the term of the new loan with Wells Fargo – 72 months, on a 2005 VW Passat!

Just say “no” to that loan!

Why Is This Legal? [Credit Slips]
(Photo: spidra webster )

Comments

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  1. SOhp101 says:

    If ANY company offers u an equity loan on your car, it’s a bad choice.

  2. MyPetFly says:

    Immoral criminals, plain and simple.

  3. So, after she agreed to the loan, took the loan, spent the money that the loan gave her, and defaulted on the loan, she thinks it’s illegal? She didn’t think this back when she signed for it? Right on.

  4. homerjay says:

    Thats f’d up right there.

  5. chemmy says:

    Read it and think about it before you sign it and agree to it! Sorry to blame the consumer…. but she did agree to the terms when she signed it… Maybe should have thought that one out a little bit.

  6. chemmy says:

    I will add, though, that the bank should be ashamed of such predatory lending.

    We have to wonder that if the banks weren’t preying on people they knew couldn’t pay…. would our economy still be in the toilet right now?

  7. evslin says:

    Interested in seeing how the numbers behind the loan were presented to her prior to signing. I can’t really imagine any circumstances where I’d think agreeing to pay an additional $25,000 on my car loan would be worth $5,000 in cash right now.

  8. cotr says:

    just two weeks ago as i was looking to refi my car loan, BofA (of course) told me i could do the same thing. I asked them why anyone would ever do that and they said some people do.

  9. Aphex242 says:

    Another lending crisis coming in 3….2….1….

  10. Tightlines says:

    Blame them both. Everybody has had a hand in this damn mess…the banks who gave out shitty loans all willy nilly and the consumers who gladly took those shitty loans. Why do Americans seem to have this innate inability to see past what they’re going to be eating for dinner that night?

  11. chemmy says:

    @evslin:

    And I stil can’t wrap my head around getting equity out of a depreciating asset! Why would anyone do such a thing?

    If it’s losing value, how do you get equity?

    My head hurts…

  12. halftank says:

    Wow…ponderous, fucking ponderous

  13. chemmy says:

    @Tightlines:

    I think just as much as banks fail to educate people and give out predatory loans like they’re going out of fashion (lol), so too are the consumers not educating themselves. It’s too easy to think “I need cash now – to hell with later”

    Then later comes and they cry that the big bad bank ruined them…

    So I agree that each is at fault. People need to be educated. Perhaps since the bank is the one drafting all the docs, they can educate the consumer too (as if)

    We will give you $5000 now but you will then owe an additional $25,000 on your car note….

  14. MyPetFly says:

    @chemmy:

    >> If it’s losing value, how do you get equity?

    That’s why it was an immoral thing to do. They called it an equity loan when in fact it wasn’t.

  15. Orv says:

    @chemmy: Well, you get equity by paying it off faster than it depreciates. This is how it’s supposed to work with cars, after all — the last thing you want is to be upside-down, owing more on the car than it’s worth.

    The bizarre thing isn’t that there’s equity, but that any bank would think it’s a good idea to let someone tap it with a loan. The only sensible way to tap equity in a car is to sell it and buy a cheaper car.

  16. lightaugust says:

    Just wondering how it is that banks, after posting billions in losses in the mortgage mess, are going to turn around and do the same thing with cars? I’ll fight, scrimp and save to keep my house, but if I’m in a pinch, I’m pretty ready to hand over the keys. Does anyone at HQ think this is a good business plan? Or are they as ready to have a parking lot full of used cars as they now have foreclosed properties?

  17. ConsumerAdvocacy1010 says:

    Yeah, you have to blame the consumer on this one. An interest rate of 3% that MORE than quintuples to 16%+???

    And on a car…no less.

  18. wallapuctus says:

    So can they foreclose on her car and take it away? When the car is worth $3000 in 5 years can she just stop paying and let the bank take it off her hands? Sounds like a good deal to me.

  19. MyPetFly says:

    @lightaugust:

    They apparently are ready to own a mass of used cars. My wife had a leased vehicle, and when the time came to turn it in or buy it, they didn’t want to finance it. It wasn’t a credit-based decision — it just wasn’t their policy. So they took it back.

    I don’t know the ins and outs of leasing from the bank’s perspective, but it was a surprise that they would have rather taken the vehicle back.

  20. backbroken says:

    Ok, let’s see how the ‘stop blaming the consumer’ crowd can spin this one.

  21. Edge23 says:

    Why am I supposed to feel sorry for her? She did not read the loan papers and didn’t get professional advice before signing the loan. The bank may have taken advantage of her stupidity, but that is not illegal.

    People need to use their brain and get a lawyer anytime doing a loan.

    I took an equity line for my home from Wells Fargo, but then transferred the balance to no interest credit cards, which I have been paying off.

    I’ve had to sign for a new 0 interest credit card every year or so, but I will be done paying off the balance in Oct.

  22. Jesse says:

    The lesson here: Read your contracts & ask questions before you sign them!

  23. chemmy says:

    @Orv: Or to buy a car that is appreciating in value…. But then you’d have a collector’s item on your hands and probably wouldn’t be financing it thru Wells Fargo anyway ;)

  24. Edge23 says:

    @MyPetFly: What law was broken? Please cite it.

  25. Parting says:

    @chemmy: Still I wonder, how can you make a loan like this and sleep tight at night?

    As sales reps in electronics, we always warned customers when the product was crappy, then if the customer buys it ”it’s 50$ cheaper!”, not my problem any more. You were warned.

    Which brings me to the point, that many people are very greedy, and don’t think about future consequences, as long as they save some now.

  26. MyPetFly says:

    @Edge23:

    Okay, I over-reacted. ; ) Although I’m not certain it’s not criminal. Are usury laws still around? I’m no legal or financial expert.

  27. sgodun says:

    Yet another Consumerist article showcasing the inadequacies of consumers AND lambasting the corporations in the same breath.

    Yes, Wells Fargo is scummy for doing this. But the customer is a complete idiot for FAILING to pay attention to what she was getting into.

    Folks, shitty deals like this WILL NOT EXIST if you just PAY ATTENTION.

  28. Orv says:

    @backbroken: I’m not willing to blame her without knowing how the terms were disclosed to her. I seriously doubt she was told how much this would increase the amount of her car loan. My guess is they hid how much it would cost her.

  29. ninjatoddler says:

    The only good thing about WellsFargo is that they usually have better customer service than other banks. That being said, their savings have the lowest interest rates and loans with one of the highest among the larger financial institutions.

  30. humphrmi says:

    The funny part is, Wells Fargo is going to get stiffed for their greed (at least on this one). Since they already reposessed her car, the remaining balance (what the lawyer called “deficiency balance”) is now unsecured credit and puts Wells Fargo way at the back of the line in bankruptcy court.

  31. Tracy Ham and Eggs says:

    @Orv: They hid the fact that they were handing her cash? More cash then her car was worth?

    Basically this is the same as an interest only loan on a mortgage, only with more risk and less asset.

  32. @Edge23: A lawyer anytime you do a loan? I’d like to think I have enough brains to enter into an auto loan without hiring a lawyer.

  33. jimconsumer says:

    This is entirely her fault. Period. This isn’t “blame the victim”, she’s NOT a victim. She willingly signed that loan and agreed to those terms. Now she’s mad about it? Whatever happened to personal responsibility? She’s retarded and the loss of her car and her good credit was her own damn fault.

  34. punkrawka says:

    @Orv: No matter how many other pieces of paper they hide it in, you do have to sign a sheet of paper that clearly states the total loan payoff amount if you follow the payment schedule. She had to sign a piece of paper that said $48K on the top. If she didn’t look at it that’s her fault. If the bank actually didn’t present it, yes, that’s criminal. But I don’t really see Wells Fargo leaving something like that out, knowing that the customer could probably have the penalties voided in court as a result.

  35. @sgodun: The article really doesn’t blast Wells Fargo, it simply says that Wells Fargo was the bank underwriting the loan.

  36. Tracy Ham and Eggs says:

    @evslin: If its anything like a refi mortgage, the cash in hand was just part of the cash out. They usually pay off the other bills as part of the terms of the loan (so you dont go spend the money they are lending you without paying down your other debt). Its easy to see how it makes sense on first blush, since you pay off 20%+ credit cards with a 15% loan, but at some point you wind up being upside down on a dead car.

  37. aka Cat says:

    @evslin, it probably looked something like this:

    Your car equity loan will be for the same amount as the original loan! You borrowed $23k for the original note, and that’s what we’ll write this loan for! (Nevermind that your car isn’t worth 23k anymore, or that we’ve quintupled the interest rate!!!)

    My guess is, the amount it would take to finish paying the original loan, including all interest for the full period of the loan, was the $23,600 figure. While the balance plus interest of the new loan comes to nearly $49k.

    Her fault for not reading the documents and finding out what the new interest rate was. Or if she was aware of the new rate, understanding how that affected the amount that she would be paying the bank.

    But it’s still pretty scum-sucking behavior on the part of the lending officer who wrote up that piece of crap.

  38. Wormfather says:

    Wow, that’s just messed up. The type of person (financially speaking only) that would need an equity loan on a 2005 VW is not the type of person that could handle a $50K car loan.

    Yes the customer signed the contract and should have read the details, but anyone who tells me that Wells Fargo wasnt hoping that she was either a. very desperate or b. wouldnt read the contract, well, if you belive that I’ve got a lovely 125 year old bridge to sell you.

    Shame on you Wells Fargo, we’ll see you in next years Worst Company brackets.

  39. Edge23 says:

    @silencedotcom: If you don’t need a layer to look over the forms, then good for you. I didn;t either, but I read my loan forms numerous times to make sure I understood the terms and language.

    This woman did not. She is at fault.

    Large companies have lawyers looking out for their interests. If people want to be safe, then should hire a layer – who is on their side.

  40. jojo319 says:

    does anybody know how loans work in other countries? I’m just curious if Americans are having to cover the gaps due to limits imposed by other governments. Similar to prescriptions. Most countries have limits on what the drug companies can sell their drugs for (Canada included) so the US consumer is forced to pay higher prices. Am I making an sense at all?

  41. Edge23 says:

    Also, if she was in final trouble – why didn’t she sell her car and buy a used and cheaper one?

    This story shows people make dumb decisions. I’ve never paid over $10,000 for a car. I’ve always bought used.

  42. SacraBos says:

    And there a few “Texas Star Car Title Loan” shops cropping up around here. Sounds like the same thing, and probably more predatory than Wells Fargo (if that’s possible). Pawn shops and cash advances are bad enough, but this is scary.

  43. Radoman says:

    I didn’t see anywhere that it said she was “completely aware” of the terms of this loan when she signed. I agree that you’d have to be insane to sign a contract with these terms, however a large slice of the population isn’t very good with money. (See: housing bubble) Often, people I see who are in trouble financially were honestly unaware of the severity of contracts they signed.

    I mean, there’s full disclosure in the contract, but that doesn’t help someone who doesn’t understand it. Loan officer explains, , they feign understanding, they nod, they sign.

    People don’t want to admit they have no idea what’s going on. Banks profit. Math is important kids!

    Still, bad form Wells Fargo.

  44. allstarecho says:

    This is exactly why I refinanced my car and got away from Wells Fargo. They are croooooooook-ed.

  45. Farquar says:

    There are too many uneducated people.. or people just plain intimidated by the aura of the bank to ask questions. On top of that WAY too many people who think the people at the bank are looking out for the customers best interests.

    That said the customer here signed a bad deal and has to deal with it (in this case, bankruptcy, so.. eh). Wells Fargo is a sketchy company for coming up with this masterful plan at bilking their customers, and long term will pay for it. If not monetarily, immediately, then hopefully customers will wise up and move to local banks and credit unions.. (as they should anyway)

    You wonder how a loan sales rep sleeps at night, but I would suspect that a good many of these sales reps don’t understand how the loan works either..

    You wonder how the higher ups that come up with this crap sleep at night.

  46. Nytmare says:

    So what happens to her home loan when she defaults on the car loan from the same place?

    And it’s not clear — was this a telemarketing sales pitch? If so, the offer should have been rejected outright — you can’t see the numbers and terms in front of you, nor comparison shop.

  47. Landru says:

    Predatory Lending…

    “Predatory lending is defined as intentionally placing consumers in loan products with significantly worse terms and/or higher costs than loans offered to similarly qualified consumers in the region for the primary purpose of enriching the originator and with little or no regard for the costs to the consumer.”

    Fuck Wells Fargo. On those terms, how could they expect her to not default? Watch – when a jillion people default on their CELOC’s, they will ask for a bailout.

  48. chemmy says:

    @Landru:

    Oh so my overuse of the term wasn’t all bad!

  49. Orv says:

    @Edge23: The kinds of people who need these kinds of loans are, by definition, the kinds of people who can’t afford lawyers. (I suspect the banks know this, too.)

  50. Tylas says:

    I can see how she got suckered if she didn’t read the fine print or ask the right questions. Wells Fargo tried to do the same thing to me. I wanted to refinance because I have a higher interest rate on my car (no house, just got out of the military so credit rating was questionable) and I wanted a lower rate. They called me at about the time I was looking.

    They said, yeah it’s Christmas and you could use the money and I’m your friend and I know whats best for you blah blah. They even told me there is no closing cost when in fact it was $1300 dollars. Then they wanted to raise the interest rate to %17.8 percent! My credit cards are lower than that for god’s sake! And they didn’t tell me that until I persisted in wanting to know it.

    If they call you, they are a slimey bastard. Glad I got out of it without committing. If you want to refinance, find a company yourself – or just pay it off and start a bank account to pay for your new car in cash like me.

  51. erratapage says:

    She’s at fault in the same way that I’m at fault for leaving the keys in my ignition the day it was stolen (hypothetical only). That doesn’t mean the thiefs weren’t at fault.

    In this instance, I think more blame goes to the bank, since they are the ones attempting to scam consumers into these kinds of loans.

  52. bohemian says:

    @Farquar: Yes! Exactly. There are too many people who think a bank is looking out for their best interests! It happens at car dealerships, mortgage lending too.

    I have seen it in action. You would be mortified to see some of the supposedly educated and intelligent people who seem to be incapable of looking out for themselves. Much of it comes from assuming other people are honest and a bit that they don’t get it that most business relationships are to some extent adversarial.

    There is also a level of lack of understanding. People don’t understand the basic concepts in a loan or what all the terms mean. Instead of asking they blankly nod and sign, hoping the bank has their best interests in mind.

    Consumer Math needs to be mandatory for HS graduation in all 50 states.

  53. backbroken says:

    @bohemian: “Consumer Math needs to be mandatory for HS graduation in all 50 states.”

    Many folks in consumer hell didn’t get that far in their education anyway.

  54. revmatty says:

    @Tightlines: Precisely. There’s plenty of blame to go around here. The consumer was an idiot for agreeing, and the bank deserves to be left holding the bag for offering such a clearly bad product.

  55. @Edge23: Yep. I agree. Plain and simple, reading that might have stopped this from happening.

  56. shockwaver says:

    @Edge23: I agree with this – if you can’t afford a 23k car… don’t buy a 23k car? I’m sorry, but it’s the same crap as all the subprime loans – if you can’t afford it DON’T FUCKING GET THE LOAN.

    Oh, and read the fine print. Before you sign anything. I operate on the assumption that any financial institution is out to screw me, and read the contracts like that before I sign.

  57. battra92 says:

    A fool and their money are soon parted. That doesn’t mean that it isn’t taken by crooks but seriously, who really thought this was a good idea?

    I blame the education system.

  58. chemmy says:

    @shockwaver: A good assumption to have.

  59. Dave on bass says:

    @halftank: Hey thanks Casey! ;-) Great quote, and my sentiments exactly.

  60. kc2idf says:

    Heh. My car has no equity (Okay, maybe I can get five C-notes for it). It’s a 1999 Geo Prizm.

    Of course, it’s best feature is that it is paid off…. a feature I will not give up.

  61. battra92 says:

    @Edge23: So true. People never want to give something up or lessen THEIR lifestyle to make things better.

    I bought the new car last year and after having a year to think it over, next time I’m buying used in cash (well on my credit card to gain the rewards and then pay the bill immediately.)

    I actually debated on selling the car as it’s an unnecessary expense since my old 98 Cavalier including maintenance never came close to what I’m paying in monthly bills for it now. Heck, the Blue Book value of my car is less than what I owe on it. Part of me would just like to sell it and eliminate the monthly payment and buy a car in cash using savings.

  62. Jesus Christ.

    Oops Sorry. But that was my first thought when I read about a loan on a depreciable asset.

  63. Jabberkaty says:

    My mind is boggled. Not just that she was stupid enough to take the load, but that they even OFFER loans like that – I mean, so they repo the car, which they have to sell and try to make some kind of profit on, and still waste resources trying to get her to pay…

    I say she deserve to pay up for being stupid, and the bank deserves the hassle and cost for being stupid. It’s truly how stupidity should be rewarded.

  64. Jabberkaty says:

    er loan. take the loan. Sorry.

  65. GoPadge says:

    @Tightlines: I think a part of the problem is that our government regulators allow banks and their ilk to show the consumer 50 pages of crap that is purposely worded to confuse people. There needs to be a plain language rule where all the legalease is translated into English.

  66. technopimp says:

    I have a credit card with Wells Fargo, and I have regretted opening it since day one. At least once a month they call me telling me how they’ve been “reviewing my credit and it seems I could use some help with debt management”. First, I never asked them to “review my credit” (they say it’s a “free service”). Secondly, after I (repeatedly) tell them I’m not interested, they start rattling off credit cards I have and loan balances, saying how I “really need to start paying some of them down”. The last guy actually asked me “so, what’s going on in your life? It seems like you have a lot of debt? You’re obviously bad at managing your credit, I think you need our help”. I have repeatedly told them to stop calling me, but they are relentless. (For the record, I have an excellent credit score, and am “managing” just fine…all their calls have been to offer me an equity loan on my car).

  67. humphrmi says:

    @GoPadge: There is a plain-language statement in every consumer loan, it’s the Truth In Lending Disclosure “box” that must be included by law in all consumer loans, and one of those boxes is the exact and total amount you will pay for this loan, including all fees and finance charges, if you service the loan for the full term. The trouble is, I’ve noticed that car financing scum seem to have a tendency to put that document toward the back of the pile of documents you have to sign. I once pissed off a finance manager because he handed me a neat pile of papers to sign, in order, and I rummaged through his nice neat pile and pulled out the disclosure page to read first.

  68. wring says:

    what a clusterfuck. this is worse than a cash advance.

  69. Joe S Chmo says:

    This is something pawn shops used to do in Florida. I think it was outlawed back in the 1990s.

  70. mythago says:

    @Edge23, dude, make up your mind. Are people idiots if they don’t hire a lawyer to review the paperwork when they get a loan, or aren’t they? Why does “get a lawyer” apply to everybody but you?

    Amazing a concept as it may be, blame is not a zero-sum game. It is entirely possible for this consumer to have been stupid, AND for Wells Fargo to have intentionally engaged in predatory lending – surely I can’t be the only person wondering about that $1300 in fees.

  71. meadandale says:

    PT Barnum was right….yet somehow it’s the banks fault that people are stupid?

    Hell, if I was totally devoid of any sense of decency or ethics I’d have come up with something like this. I particularly like the whole loan origination fee of 3x the actual loan.

    People never complain about casinos when they’re winning, only when the casino takes their whole stack of chips.

  72. g4lt says:

    how many “blame the consumer” people are going to side with wells fargo when they try to get a fed bailout because of bad loans? Wells Fargo knew the terms too, they WROTE them, and yet they loaned out he money. When WF looks for a bailout, I expect each and every “blame the consumer” poster to write their congresscritter and tell them what a bad idea it is to spend taxpayer money on their bad decisions.

  73. meadandale says:

    I don’t support a bailout for either the customers or the bank. They both knew what they were doing, or should have. Let the chips fall where they may.

  74. Wells Fargo called me about my home loan (I looked into them while picking out a mortgage company).

    They called me 6-8 times a day, about once every hour during the weekdays for about a month trying to hassle me into using them. I do not know if it was a specific agent’s policy or they farm the calls out to a call center or what, but I am not exaggerating at all about the frequency. I have never dealt with such a pushy bunch of people and would never use anything from them for the aggravation factor alone.

  75. enine says:

    @ninjatoddler:

    Well Fargo has good custmer service? They bought our my mortgage a few years ago and since then I have had nothing but problems. First it was the telemarketing calls which I always decline whatever they are selling and sometimes they sign me up for it anyway so I have to fight to get it removed and refunded. I ask to not be called and find out that I’m speaking to a sub contractor on behalf of wells so I only get put on the sub contractors do not call list so within a few months I get calls again until I finally wrote a letter to wells to aksing them to not solicit me. Then I get the scammy sales flyers in my bill so I signed up for paperless to get rid of those. Now they have decided to have their collections department call me because my payment is on time, yes the collections person is surprised their autodial system called me since they see my payment is there on time as always.

  76. mariospants says:

    This is about as bad as cashing a Nigerian money order and “keep(ing) 10%”… sheesh

  77. thoog says:

    With all due respect, which in this particular case is none whatever, you have to be pretty damn stupid to think it makes sense to pay your grocery bill by taking out a loan at more than 16% interest. What should be illegal is this woman being allowed to vote.

  78. mzs says:

    I bought a used volvo. That thing hardly depreciated in five years. I took out loans against it three times at rates between 6-8%. I needed the cash for large unexpected issues. You needed a car that did not depreciate much, also I needed to get more expensive insurance to qualify.

  79. god_forbids says:
  80. sodden says:

    @Tightlines: right, because anyone who isn’t american couldn’t possibly be scammed.

  81. sodden says:

    @backbroken: Oh please. No one is claiming the woman didn’t screw up. But that doesn’t make the bank innocent in this.

  82. jimmydeweasel says:

    I guess you’ll want congress and the US taxpayer to bail you out because you’re a moron. It takes 2 to make a deal. You should have boinked them in the eye when they asked you to sign that deal. Bank’s are crooks. Those fancy bank buildings and executive salaries don’t come from their pro- bono work in the community. Where did you go to school? Obama’s Pollyannaville?