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Amidst the ongoing investigations and litigation issues in the banking sector by various regulators, Wells Fargo & Company (WFC - Analyst Report) along with two insurance companies – Assurant Inc. (AIZ - Analyst Report) and QBE Insurance Group has emerged with a legal settlement. In another similar lawsuit related to force-placed insurance, HSBC Holdings plc (HSBC - Analyst Report) has also agreed to the settlement.

Wells Fargo and HSBC have decided to settle the lawsuits that accused the companies of overcharging thousands of homeowners for force-placed insurances. HSBC is expected to pay an aggregate of $32 million to settle the class-action lawsuit in Miami, while the amount to be paid by Wells Fargo and the two insurance companies was undisclosed.

Force-placed insurance is generally ordered for those homeowners who refuse to buy insurance themselves. Though the mortgage agreement gives lenders the right to force-placed insurance, the plaintiffs accused Wells Fargo and HSBC of providing high premium insurance coverage to homeowners to earn additional commission.

As per the settlement terms, Wells Fargo and the two insurance companies will pay 11% cash reimbursements to those class members who paid entire premiums on the force-placed insurance. On the other hand, HSBC homeowners will be paid 13% of the entire premium billed.

Additionally, the agreements, which still require the consent of court, ordered the banks to stop the collection of commissions related to force-placed insurance policies over a period of five to six years from the date of the settlement.

In Feb 2014, Citigroup Inc. agreed to pay an aggregate of $110 million to settle the similar class-action lawsuit in New York. However, the settlement awaits approval.

Last year, JPMorgan Chase & Co. (JPM - Analyst Report) and Assurant also agreed to similar settlements and agreed to pay an aggregate of $300 million, which got approval in Mar 2014. The class-action lawsuit was filed in Jun 2012 on behalf of homeowners who were compelled to take insurance policies as of Jun 2008.

Regulatory authorities are working hard to put forward a landmark judgment to terminate such shrewd practices in the future, bring justice to the sufferers and punish the wrongdoers. While settlement of such issues will bring reprieve to the banks, this comes as a huge blow to their financials.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold), while HSBC carries a Zacks Rank #4 (Sell).

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