CFPB Crackdown on Loan Servicers
Discover Bank agrees to pay $18.5 million in consumer refunds and penalties to resolve charges of illegal loan servicing, as U.S. consumer protection bureau eyes a broader crackdown on an industry it says is rife with problems.
Discover Bank has agreed to pay $18.5 million to resolve allegations that its student loan servicing and debt collection practices were illegal, the Consumer Financial Protection Bureau announced Wednesday.
The settlement, $16 million of which will be paid out in refunds to borrowers, marks the first time the CFPB has publicly taken an enforcement action against a student loan servicer since it began overseeing much of the industry in 2013.
It also comes as the consumer bureau signals that it may crack down on student loan servicers even further by issuing its own set of rules governing how those companies operate.
The CFPB said Discover overstated the minimum amount due on borrowers' billing statements, misrepresented information that could have allowed borrowers to receive tax benefits and called borrowers early in the morning and late at night, “often excessively.” The company also, according to the CFPB, failed to provide defaulted borrowers with legally required notices about their rights.
“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” CFPB Director Richard Cordray said in a statement. He called the action “an important step in the bureau’s work to clean up the student loan servicing market.”
The CFPB last week ended a “public inquiry” into student loan servicing and received more than 30,000 comments in response to its request for information that may be used to inform new regulations.
Bureau officials have repeatedly said they’re concerned that loan servicing problems similar to those that plagued the mortgage industry during and after the financial crisis are cropping up in the student loan market. The CFPB’s response to the mortgage problems was to issue regulations that took effect last year.
The Discover settlement applies only to private loans, many of which it acquired from Citibank, but CFPB officials have made clear that they are also worried about the quality of loan servicing for borrowers who owe money directly to the U.S. Department of Education for federal student loans.
The consumer bureau last year referred to the Department of Justice allegations that Navient, formerly Sallie Mae, overcharged military service members on their federal and private loans. Navient agreed to pay $97 million to settle the government’s charges, but it denied any wrongdoing.
The Education Department’s subsequent review of Navient and its other loan servicers largely cleared the companies of wrongdoing. The department last fall renewed Navient’s loan servicing contract, to the consternation of a coalition of student, labor and consumer groups and some Democratic lawmakers who had been pushing the department to cut ties with the company.
The Education Department has said it plans to conduct a new competitive bidding process for its loan servicing business later this year.
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