Discover Financial Ordered to Pay $18.5 Million Over Student Loan Practices

Consumer Financial Protection Bureau alleges firm overstated accounts, engaged in illegal tactics

ENLARGE
Discover Financial Services was ordered to pay $18.5 million by the Consumer Financial Protection Bureau over alleged illegal practices related to student loans.PHOTO: ASSOCIATED PRESS

By ANNAMARIA ANDRIOTIS
Updated July 22, 2015 1:04 p.m. ET

Discover Financial Services Inc. has been ordered to pay $18.5 million by the Consumer Financial Protection Bureau, which alleged that the firm engaged in a series of illegal practices related to the repayment and collection of student loans.

The consumer regulator alleged that Riverwoods, Ill.-based Discover overstated the minimum payment amounts borrowers had to make, engaged in illegal debt-collection tactics and denied borrowers information about how they could receive federal income-tax benefits.

The enforcement action is the regulator’s first against a student-loan servicer. Discover is also the third largest student-loan lender by origination volume.

Discover neither admitted or denied the allegations. A Discover spokesman declined to comment. The lender is reporting earnings later today.

It is the regulator’s second action against Discover, which was ordered by the CFPB and the Federal Deposit Insurance Corp. in 2012 to pay around $214 million for deceptive marketing and sales of credit-card add-on products.

Student-loan servicers are generally the main point of contact for borrowers who send their monthly payments to these companies and contact them with customer service questions. They typically also handle requests from borrowers who run into financial trouble and need to delay or lower their payments without incurring a penalty on their credit reports or scores.

More than 40 million student-loan borrowers in the U.S. use student-loan servicers. While borrowers choose which lender to get their loan from, they generally don’t have control over selecting the firm that services their loan while they repay it.

The CFPB’s enforcement action states that Discover failed to provide “the most basic functions of adequate student loan servicing” for a portion of the 800,000 loan accounts it bought from Citigroup Inc.beginning in 2010. It says thousands of consumers encountered problems when they fell behind on their loans and that the lender sent them monthly statements with minimum payments higher than what was required.

The regulator says Discover placed more than 150,000 calls to borrowers at inappropriate times, including early in the morning and late at night. for debts that were in collection. The company learned about the violations in October 2012 but didn’t address the problem until February 2013, according to the CFPB.

Discover was also found to have misrepresented the amount of interest student loan borrowers were paying. Student-loan servicers are supposed to supply borrowers who pay more than $600 in interest in a given year with a statement for tax deduction purposes, according to the CFPB. The regulator says that Discover failed to do provide the form with the interest amount paid to certain borrowers for 2011 and 2012.

Under the enforcement action, Discover will return $16 million to more than 100,000 borrowers. It will provide an account credit to about 5,200 consumers who were misled about the minimum payments in an amount equal to the greater of $100 or 10% of the overpayment, up to $500. It will give back up to $300 to about 130,000 consumers who can amend their 2011 or 2012 tax returns to claim student loan interest deductions—or an account credit of $75 for each tax year.

Discover will also provide $92 account credits to consumers who received more than five and fewer than 25 collection calls at inappropriate times and account credits of $142 to consumers subjected to more than 25 calls, totaling about 5,000 borrowers.

The CFPB has been a vocal critic of student loan problems since its launch—and has paid close attention to student-loan servicing. The regulator in October highlighted illegal actions it discovered while supervising student-loan servicers, at which time the CFPB’s director Richard Cordray said he intended to hold firms accountable.
In May, the CFPB began accepting commentary from student loan servicers, lenders, borrowers and others on suggestions that could improve servicing and reduce student loan defaults—which are expected to lead to new borrower protections in this space.

The bureau supervises student loan servicing at the largest banks and nonbanks. This includes the seven largest student loan servicers that handle more than 49 million borrower accounts. Its supervision in this sector expanded in December 2013 when it added nonbank institutions that handle more than one million federal or private accounts.

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