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

Discover to Pay Borrowers $16M for Illegal Private Student-Loan Servicing

Discover to Pay Borrowers $16M for Illegal Private Student-Loan Servicing

Citing illegal servicing of private student loans, the U.S. Consumer Financial Protection Bureau says Discover Bank and its affiliates overstated the minimum amounts due on billing statements and denied consumers information they needed to obtain federal income tax benefits.

Discover also took part in illegal debt collection tactics, including calling consumers early in the morning and late at night, alleges the CFPB. The Bureau’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 allegedly overstated the minimum amount due for certain borrowers who were just starting to pay off their student loan debts. The minimum payment due incorrectly included interest on loans that were still in deferment and were not required to be paid, the Bureau said. For some borrowers this overpayment meant diverting payments from other expenses; for others it meant not paying at all because they thought they could not come close to making the full payment and instead accrued associated penalties.

The U.S. tax code permits taxpayers to deduct student loan interest paid during the year under certain conditions. Servicers are required to provide borrowers with a statement specifying how much the borrower paid in interest, if it was more than $600. Discover did not provide the Citibank private student loan borrowers with the customary tax information form it provided to its other borrowers, unless those borrowers submitted certain paperwork.

Discover Bank is an Illinois-based depository institution. Its student loan affiliates – The Student Loan Corporation and Discover Products, Inc. – are also charged in the CFPB’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.

The CFPB said Discover will return $16 million to more than 100,000 borrowers: Specifically, Discover will:

  • Provide an account credit (or a check if the loans are no longer serviced by Discover) to the consumers who were misled about their minimum payments in an amount equal to the greater of $100 or 10 percent of the overpayment, up to $500. About 5,200 victims will get this credit;
  • Reimburse up to $300 in tax preparation costs for consumers who amend their 2011 or 2012 tax returns to claim student loan interest deductions. For consumers who do not participate in this tax program or did not take advantage of earlier ones offered by the company, Discover will issue an account credit of $75 (or a check if their loans are no longer serviced by Discover) for each relevant tax year. About 130,000 victims will receive this relief; and
  • Provide account credits of $92 to consumers subjected to more than five but fewer than 25 out-of-time collection calls and account credits of $142 to consumers subjected to more than 25 calls. About 5,000 victims will receive these credits.

 

 

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