Discover paying $18.5M over student loan violations

Kevin McCoy | USA TODAY

Discover Bank and two affiliates will pay $18.5 million in consumer refunds and fines for using illegal practices while servicing private student loans, a federal regulator said Wednesday.

The Illinois-based depository institution overstated the minimum amounts due on billing statements, failed to provide information borrowers needed to obtain federal income tax benefits and used illegal debt-collection practices by calling borrowers early in the morning and late at night, the Consumer Financial Protection Bureau said.

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

The bank declined to comment on the consent order and neither admitted nor denied the CFPB findings.

Shares of parent firm Discover Financial Services (DFS) barely budged Wednesday, rising 0.1% to $59.50.

Discover expanded its private student loan portfolio in 2010 by acquiring more than 800,000 accounts from Citibank. While acting as a loan servicer, the bank is responsible for providing periodic account statements, supplying year-end tax information and contacting borrowers about overdue payments.

According to the CFPB, Discover and two affiliates:

Overstated the minimum amount due for borrowers who were just starting to repay their student loans. The amount provided incorrectly included interest payment on loans that were in deferment and were not required to be paid.

Failed to give student loan borrowers customary tax information that could have enabled them to seed federal tax deductions for interest payments of more than $600 on the loans.

Placed more than 150,000 phone calls to student loan borrowers before 8 a.m. and after 9 p.m. in the borrowers' respective time zones.

Neglected to give borrowers specific information about the amount and source of the debt, as well as the borrowers' right to contest the charges.

The consent order requires Discover to return $16 million to more than 100,000 borrowers. Depending on the circumstances of each loan, the payments will be made through account credits, repayments of tax-preparation costs or account credits

The bank must also pay a $2.5 million CFPB penalty, as well as ensure that it accurately presents minimum required loan payments, sends clear and accurate tax information to borrowers and stops phoning borrowers during early and late hours.

Student loans comprise the nation's second-largest consumer debt market, with more than 40 million federal and private student loan borrowers who collectively owe more than $1.2 trillion, the CFPB said.

More than 8 million borrowers were in default on more than $110 billion in student loans, a problem that may be complicated by problems with loan servicing, the CFPB said in a report earlier this year.

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc.



