Discover Fined For Illegal Student Loan Practices

Consumer Financial Protection Bureau Director Richard Cordray

Yuri Gripas / Reuters

One of the country's largest private student loan servicers, Discover Bank, was fined $18.5 million Wednesday by the Consumer Financial Protection Bureau for a host of illegal practices. The action is Bureau's first action against a student loan servicer, the latest step in the government's attempts to ferret out bad practices by banks and nonprofits that service private student loans.

"Today’s action demonstrates how Discover failed at providing the most basic functions of adequate student loan servicing," the CFPB said in a statement.

Discover, the CFPB said, frequently overstated the minimum amounts borrowers had to pay on their loans, and used illegal and harassing debt collection practices, calling borrowers at all hours of the day and night. It also withheld key information from borrowers about the interest they had paid, causing them to miss out on tax benefits.

The bank's bad practices were concentrated in a chunk of the bank's private student loan portfolio acquired from Citibank, which included some 800,000 accounts, the CFPB said.

Discover's illegal practices are symptomatic of broader issues in the private student loan industry, according to a report last year from the CFPB that highlighted "risky" and "misleading" practices among a swath of private loan servicers.

The regulator launched a public inquiry in May into private student loan servicers, over whom it has stepped up oversight as the student loan debt burden grows and an increasing number of borrowers struggle with repayment. Last year, a CPFB investigation with the Justice Department resulted in a $60 million settlement with student loan giant Sallie Mae, which consistently overcharged members of the military.

The student loan industry's bad practices are not concentrated in the private lending market. The Education Department has targeted bad actors in the group of private agencies it contracts with to collect on federal loans, suspending the contracts of five debt collectors earlier this year.

Discover will be forced to return $16 million to more than 100,000 borrowers, paying an additional $2.5 million fine.