Student loans | Consumer Financial Protection Bureau

CFPB Orders Discover Bank to Pay $18.5 Million for Illegal Student Loan Servicing Practices

Discover’s Illegal Servicing Practices Affected Private Student Loan Borrowers Transferred from Citibank

WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) took motion towards Discover Bank and its associates for unlawful personal student loan servicing practices. The CFPB discovered that Discover overstated the minimal quantities due on billing statements and denied customers data they wanted to acquire federal revenue tax advantages. The firm additionally engaged in unlawful debt assortment techniques, together with calling customers early within the morning and late at evening. The CFPB’s order requires Discover to refund $16 million to customers, pay a $2.5 million penalty, and enhance its billing, student loan curiosity reporting, and assortment practices.

“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” mentioned CFPB Director Richard Cordray. “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.”

Discover Bank is an Illinois-based depository establishment. Its student loan associates – The Student Loan Corporation and Discover Products, Inc. – are additionally charged in as we speak’s motion. Beginning in 2010, Discover expanded its personal student loan portfolio by buying greater than 800,000 accounts from Citibank. As a loan servicer, Discover is liable for offering primary providers to debtors, together with correct periodic account statements, supplying year-end tax data, and contacting debtors relating to overdue quantities.

Student loans make up the nation’s second largest shopper debt market. The market has grown quickly within the final decade. Today there are greater than 40 million federal and personal student loan debtors and collectively these customers owe greater than $1.2 trillion. The market is now dealing with an growing variety of debtors who’re struggling to remain present on their loans. Earlier this yr, the Bureau revealed that greater than 8 million debtors have been in default on greater than $110 billion in student loans, an issue which may be pushed by breakdowns in student loan servicing. While personal student loans are a small portion of the general market, they’re typically utilized by debtors with excessive ranges of debt who even have federal loans.

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Today’s motion demonstrates how Discover failed at offering essentially the most primary features of enough student loan servicing for a portion of the loans that have been transferred from Citibank. Thousands of customers encountered issues as quickly as their loans grew to become due and Discover gave them account statements that overstated their minimal cost. Discover denied customers data that they might have wanted to acquire tax advantages and referred to as customers’ cellphones at inappropriate instances to contact them about their money owed. The CFPB concluded that the corporate and its associates violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibitions towards unfair and misleading acts and practices, and in addition the Fair Debt Collection Practices Act. Specifically, the CFPB discovered that the corporate:

  • Overstated the minimal quantity due in billing statements: Discover overstated the minimal quantity due for sure debtors who have been simply beginning to repay their student loan money owed. The minimal cost due incorrectly included curiosity on loans that have been nonetheless in deferment and weren’t required to be paid. For some debtors this overpayment meant diverting funds from different bills; for others it meant not paying in any respect as a result of they thought they may not come shut to creating the total cost and as an alternative accrued related penalties.
  • Misrepresented on its web site the quantity of student loan curiosity paid: The tax code permits taxpayers to deduct student loan curiosity paid throughout the yr beneath sure circumstances. Servicers are required to offer debtors with a press release specifying how a lot the borrower paid in curiosity, if it was greater than $600. Discover didn’t present the Citibank personal student loan debtors with the customary tax data kind it offered to its different debtors, except these debtors submitted sure paperwork. For these debtors who didn’t submit that extra kind, their on-line curiosity statements on Discover’s web site in 2011 and 2012 mirrored $0.00 in curiosity paid. Discover didn’t clarify that the debtors have been required to fill out a kind to get the right amount of curiosity they paid. This zero curiosity assertion was more likely to mislead customers into believing that they didn’t qualify for the student loan tax deduction, doubtlessly inflicting customers to not search necessary tax advantages.
  • Illegally referred to as customers early within the morning and late at evening, typically excessively: Discover positioned greater than 150,000 calls to student loan debtors at inappropriate instances – earlier than 8 a.m. and after 9 p.m. within the borrower’s time zone. Discover discovered about these violations in October 2012 however failed to handle the issue till February 2013.
  • Engaged in unlawful debt assortment techniques: Discover acquired a portfolio of defaulted debt from Citibank however didn’t adjust to the buyer notices required by federal legislation. For instance, the corporate failed to offer customers with particular details about the quantity and supply of the debt and the buyer’s proper to contest the debt’s validity. That data should be offered throughout the debt collector’s preliminary communication or in a written discover instantly following that preliminary communication.
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Enforcement Action

Under the Dodd-Frank Act, the CFPB has the authority to take motion towards establishments participating in unfair, misleading, or abusive practices. Among the phrases of the consent order filed as we speak, Discover should:

  • Return $16 million to greater than 100,000 debtors: Specifically, Discover will:
  • Provide an account credit (or a test if the loans are not serviced by Discover) to the customers who have been misled about their minimal funds in an quantity equal to the higher of $100 or 10 p.c of the overpayment, as much as $500. About 5,200 victims will get this credit;
  • Reimburse as much as $300 in tax preparation prices for customers who amend their 2011 or 2012 tax returns to assert student loan curiosity deductions. For customers who don’t take part on this tax program or didn’t reap the benefits of earlier ones supplied by the corporate, Discover will concern an account credit of $75 (or a test if their loans are not serviced by Discover) for every related tax yr. About 130,000 victims will obtain this reduction; and
  • Provide account credit of $92 to customers subjected to greater than 5 however fewer than 25 out-of-time assortment calls and account credit of $142 to customers subjected to greater than 25 calls. About 5,000 victims will obtain these credit.
  • Accurately characterize the minimal periodic cost: Discover can not misrepresent to customers the minimal periodic cost owed, the quantity of curiosity paid, or another factual materials regarding the servicing of their loans.
  • Send clear and correct student loan curiosity and tax data to debtors: Discover should ship debtors the IRS W-9S kind that it requires them to finish to obtain a kind 1098 from the corporate, and it should clearly clarify its W-9S requirement to debtors. Discover should additionally precisely state the quantity of student loan curiosity debtors paid throughout the yr.
  • Cease making calls to customers earlier than 8 a.m. or after 9 p.m.: Discover should contact overdue debtors at cheap instances. This can be decided by the point zone of the buyer’s identified residence or cellphone quantity, except the buyer has expressly approved Discover to name outdoors these hours.
  • Pay $2.5 million civil penalty: Discover pays $2.5 million to the CFPB’s Civil Penalty Fund.
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A duplicate of the consent order may be discovered at: https://files.consumerfinance.gov/f/201507_cfpb_consent-order-in-the-matter-of-discover-bank-student-loan-corporation.pdf

This order comes because the Bureau considers steps to make sure that all student loan debtors have entry to enough student loan servicing. Last yr, the Bureau expanded its examination program to oversee the biggest nonbank contributors within the student loan servicing market. In October, the Bureau launched an version of Supervisory Highlights figuring out a variety of unlawful student loan servicing practices at a number of corporations. Earlier this yr, the Bureau was joined by leaders from the Department of Education and the Department of the Treasury in launching a public inquiry into student loan servicing practices.

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The Consumer Financial Protection Bureau (CFPB) is a twenty first century company that helps shopper finance markets work by making guidelines simpler, by constantly and pretty implementing these guidelines, and by empowering customers to take extra management over their financial lives. For extra data, go to www.consumerfinance.gov.