Thursday, July 23, 2015

Student Loan "Abuses?"

The CFPB got Discover Financial Services to enter into a $18.5 million settlement to resolve CFPB's claims that its subsidiaries engaged in illegal student loan servicing practices.  Discover did not admit or deny the conduct alleged.  It just agreed to pay $16 million in compensation and $2.5 million in penalties to end the CFPB action against it.

News reports yesterday described Discover's conduct as  "harassment" and "lying" to student loan borrowers.  I thought it would be interesting to see exactly what CFPB alleged that Discover's subsidiaries did.  So I dug up the Consent Order.

In late 2010, Discover's subsidiaries acquired substantially all of Citibank's private student-loan portfolio (about 800,000 loan accounts) and took over as servicer on those loans.  Here is the misconduct CFPB alleged:

  • With respect to the Citibank loans, Discover failed to notify borrowers properly of the amount of interest they paid on their loans for purposes of claiming a federal tax deduction.  CFPB conceded that Discover notified borrowers on their loan statements that they would not get a form 1098-E (reporting interest paid) unless those borrowers first submitted a form W-9S (certifying that the loan proceeds were used solely to pay for qualified higher ed expenses).  That wasn't enough, according to the CFPB, and was "likely to mislead borrowers into believing that they had not paid interest qualifying for the tax deduction...." 
  • For some of the Citibank loans, Discover misstated the minimum amount due by improperly including in the minimum payment calculation interest accrued on loans still in deferment.  Apparently Discover credited all payments properly.  (The agreed redress for borrowers is an account credit equal to $100 or 10% of the overpayment up to $500 per borrower.)
  • Between late 2010 and February 2013, Discover made about 150,000 collection calls at improper times (too early or too late) because, it appears, Discover timed its calls using only the time zone associated with the borrower's cell phone number area code rather than both the area code and the borrower's mailing address.  CFPB alleged "[o]ver 1000 consumers received dozens of calls at inconvenient hours."
  • Discover engaged in collection activity with respect to 252 of the Citibank loans that were in default, and failed to comply with the consumer information requirements imposed on "debt collectors" under the Fair Debt Collection Practices Act.
Discover may have made some mistakes probably because it plunged into a politically sensitive and highly regulated line of business before it had acquired the back office capability to handle it.  Harrassment and lying?   "Abuse" of student loan borrowers?  I don't think so. 

Discover Financial Service stock held steady yesterday and it reported second quarter net income of  $599 million or $1.33 per share

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