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 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.
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.
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.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
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