As federal regulators continue to probe potentially unscrupulous student loan servicing practices, the Consumer Financial Protection Bureau has ordered Discover Bank and its affiliates to pay nearly $18.5 million in refunds and fines for, among other things, overstating amounts due on student loans and failing to notify borrowers of their rights.
According to the CFPB consent order [PDF], Illinois-based Discover Bank and its affiliates – Student Loan Corporation and Discover Products Inc. – have engaged in illegal student loans servicing and debt collection practices since at least 2010, when the company acquired some 800,000 private student loans accounts from Citibank.
The Bureau contends that since that time, thousands of borrowers encountered issues with Discover as soon as their loans became due.
The CFPB claims the company and its affiliates overstated the minimum amount due for certain borrowers who were just starting to pay off their student loan debts.
In some cases, the minimum payment due incorrectly included interest on loans that were still in deferment and were not required to be paid. As a result, some borrowers diverted payments from other expenses or failed to provide that month’s loan payment, incurring additional fees and penalties.
The CFPB also alleges that Discover and its affiliates misrepresented the amount of student loan interest paid on borrower accounts that it acquired from Citibank.
For tax purposes, student loan servicers are required to provide borrowers with a statement each year specifying how much they paid in interest if it is more than $600. The CFPB contends that Discover did not provide this information for thousands of borrowers.
Instead of readily providing the customary tax information it offered its other borrowers, Discover made the newly acquired Citibank loans holders submit additional paperwork. However, according to the CFPB, Discover never explained that the borrowers were required to fill out a form to get the correct amount of interest they paid.
As a result, the online accounts for many of the acquired loan holders reflected an interest amount paid of $0.00 in 2011 and 2012. The CFPB asserts that because of this consumers were misled into believing that they did not qualify for the student loan tax deduction, potentially causing consumers to not seek important tax benefits.
As for Discover’s allegedly illegal debt collection tactics, the CFPB contends the company placed more than 150,000 calls to student loans borrowers at inappropriate times: before 8 a.m. and after 9 p.m. in the borrower’s time zone.
Discover became aware of the violations in October 2012 but failed to address the problem until February 2013, according to the complaint.
Additionally, when Discover acquired the accounts from Citibank in 2010, it also received a portfolio of defaulted debt. When the company began attempting to collect those debts, it failed to comply with federal laws regarding consumer notices.
The CFPB states in its complaint that the company failed to provide consumers with specific information about the amount and source of the debt and the consumer’s right to contest the debt’s validity. Per federal law, this information is required to be provided during the collector’s initial communication or in written notice following the initial communication.
To settle the CFPB’s charges, Discover and its affiliates have agreed to provide $16 million in redress to more than 100,000 borrowers.
Specifically, the order requires Discover to provide an account credit to about 5,200 consumers who were misled about their minimum payments in an amount equal to the greater of $100 or 10 percent of the overpayment, up to $500. About 5,200 victims will get this credit.
The company must provide reimbursement of up to $300 in tax preparation costs for about 130,000 borrowers who amend their 2011 or 2012 tax returns to claim student loan interest deductions. For consumers who do not participate in this tax program or did not take advantage of earlier ones offered by the company, Discover will issue an account credit of $75 for each relevant tax year.
Discover is required to provide account credits of $92 to nearly 5,000 consumers subjected to more than five but fewer than 25 out-of-time collection calls. Consumer who received more than 25 of these calls will receive account credits of $142.
In addition to reimbursements made to borrower accounts, Discover must improve its billing, student loan interest reporting, and collection practices, as well as pay a $2.5 million penalty to the CFPB’s Civil Penalty Fund.
Consumer groups, who have urged the CFPB to take a more stringent look at student loans servicing, were quick to welcome the Bureau’s action against Discover.
Our colleagues at Consumers Union – the advocacy arm of Consumer Reports – say in a statement that the action against Discover sends a strong message about holding servicers accountable for their abusive practices.
“Your student loan servicer has a basic obligation to give you an accurate account of what you owe, tell you what benefits are available, and work with you to ensure your payments stay on track,” Pamela Banks, senior policy counsel for CU, says. “This action shows how Discover utterly failed to fulfill its most basic responsibilities — overstating bills, withholding crucial information from customers, and harassing people day and night.”