Discover to Pay $18.5 Million Following Student Loan Abuses

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Discover Financial Services will refund $16 million to consumers and pay a $2.5 million penalty to resolve U.S. Consumer Financial Protection Bureau claims that the bank engaged in illegal student loan servicing practices.

CFPB found that Discover overstated minimum amounts due on billing statements and denied consumers information needed to obtain income tax benefits, the agency said in a statement Wednesday. The Riverwoods, Illinois-based company also engaged in illegal debt collection tactics, including calling consumers early in the morning and late at night, CFPB said.

“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” CFPB Director Richard Cordray said in the statement. “Illegal servicing and debt collection practices add insult to injury for borrowers struggling to pay back their loans.”

Servicers are the main point of contact with student loan borrowers, whose debt currently totals more than $1.36 trillion in federal and private loans. The federal agency has pointed to servicing as a place of confusion that can lead to repayment challenges and hurdles for distressed borrowers.

‘Harmful Process’

Jon Drummond, a spokesman for Discover, declined to comment. The lender didn’t admit or deny any wrongdoing.

The Discover subsidiaries cited by CFPB “agreed to submit to the bureau within 90 days a redress plan and a compliance plan,” the lender said today in a regulatory filing.

The majority of student loans are federal debt, amounting to almost $1.2 trillion. The rest, or less than 15 percent of the market, is originated by private lenders, such as banks and SLM Corp., better known as Sallie Mae.

The CFPB, established four years ago by the Dodd-Frank Act to increase oversight of consumer financial products, in May began a public inquiry into servicing practices, “that can make paying back loans a stressful or harmful process for borrowers.” The agency has already received more than 30,000 comments.

Like mortgage servicers, student loan servicers process monthly payments. When student loan borrowers struggle and need to modify a repayment plan, they contact the servicer to enroll in deferments or forbearance or request a repayment plan based on income.

The CFPB put out a critical report about the private student loan industry in 2012, saying it was a “subprime-style” market.

Expanded Portfolio

Private lenders like Discover generally service their own loans. Federal loans are serviced by companies that have contracts with the Education Department, such as Navient Corp., whose servicing business was formerly part of Sallie Mae.

Beginning in 2010, Discover expanded its private student loan portfolio by acquiring more than 800,000 accounts from Citigroup Inc., according to the CFPB.

Discover Chief Executive Officer David Nelms has been trying to expand the bank’s reach beyond credit cards, its biggest business, in the past few years through several strategies, including growing the private student lending business. Its average total student loans rose to $8.72 billion during the first quarter from $8.38 billion the prior year.

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