In a consent decree, Discover Bank neither admitted nor denied charges brought by the Consumer Financial Protection Bureau (CFPB), but paid $18.5 million to settle the charges.
The CFPB found that Discover overstated the minimum amounts due on billing statements and denied consumers information they needed to obtain federal income tax benefits.
The company also engaged in illegal debt collection tactics, including calling consumers early in the morning and late at night.
The CFPB’s order requires Discover to refund $16 million to consumers, pay a $2.5 million penalty, and improve its billing, student loan interest reporting, and collection practices.
“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” said 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 institution. Its student loan affiliates – The Student Loan Corporation and Discover Products, Inc. – are also charged in today’s action.
Beginning in 2010, Discover expanded its private student loan portfolio by acquiring more than 800,000 accounts from Citibank. As a loan servicer, Discover is responsible for providing basic services to borrowers, including accurate periodic account statements, supplying year-end tax information, and contacting borrowers regarding overdue amounts.
Student loans make up the nation’s second largest consumer debt market. The market has grown rapidly in the last decade. Today there are more than 40 million federal and private student loan borrowers and collectively these consumers owe more than $1.2 trillion.
The market is now facing an increasing number of borrowers who are struggling to stay current on their loans.
Earlier this year, the Bureau revealed that more than 8 million borrowers were in default on more than $110 billion in student loans, a problem that may be driven by breakdowns in student loan servicing.
While private student loans are a small portion of the overall market, they are generally used by borrowers with high levels of debt who also have federal loans.
The CFPB said that Discover failed at providing the most basic functions of adequate student loan servicing for a portion of the loans that were transferred from Citibank.
Thousands of consumers encountered problems as soon as their loans became due and Discover gave them account statements that overstated their minimum payment. Discover denied consumers information that they would have needed to obtain tax benefits and called consumers’ mobile phones at inappropriate times to contact them about their debts.
The CFPB concluded that the company and its affiliates violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibitions against unfair and deceptive acts and practices, and also the Fair Debt Collection Practices Act.