The Consumer Financial Protection Bureau (CFPB) on Wednesday fined Discover Bank $18.5 million for illegal servicing practices that negatively affected thousands of private student loan borrowers.
The bureau ordered Discover to refund $16 million to affected borrowers – those with private student loans transferred from CitiBank – and to pay a $2.5 million penalty. According to the CFPB, Discover overstated the minimum amounts due on statements, denied borrowers information to obtain federal income tax benefits, called borrowers at inappropriate times and engaged in illegal debt collection tactics, such as failing to give borrowers “specific information about the amount and source of the debt and the consumer’s right to contest the debt’s validity.”
“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” said CFPB Director Richard Cordray, in a statement. “Illegal servicing and debt collection practices add insult to injury for borrowers struggling to pay back their loans. Today’s action is an important step in the bureau’s work to clean up the student loan servicing market.”
The bureau also ordered Discover to improve its billing, student loan interest reporting and collection practices. The bank – whose student loan affiliates The Student Loan Corporation and Discover Products, Inc. are also charged in the action – acquired more than 800,000 private student loan accounts to service from CitiBank in 2010, the CFPB said.
In misstating the minimum amounts due on billing statements, the CFPB found Discover incorrectly included interest on loans that were still in deferment, which resulted in some borrowers spending money they didn’t have on loan payments, and others not making their payments at all and racking up penalties.
Discover also failed to provide borrowers with information that could have benefitted them when filing their taxes by deducting how much interest they paid on their loans. According to the CFPB, Discover didn’t provide CitiBank borrowers with information about how much they paid in interest during the year – the same information it gave to its other borrowers – unless they submitted specific paperwork. The borrowers who did not submit the additional paperwork received statements showing a $0.00 balance in interest paid in 2011 and 2012, the CFPB said.
Loan servicers at Discover also called borrowers early in the morning – before 8 am – and late at night – after 9 pm – more than 150,000 times, and failed to address the issue for four months after initially learning of the violation.
“Today’s action demonstrates how Discover failed at providing the most basic functions of adequate student loan servicing for a portion of the loans that were transferred from Citibank,” the bureau said in a release. “Thousands of consumers encountered problems as soon as their loans became due and Discover gave them account statements that overstated their minimum payment.”
Publication Date: 7/23/2015