Beginning with a May 2015 field hearing and request for information – and culminating consent order dated July 22, 2015 – recent actions by the Consumer Financial Protection Bureau (CFPB) highlight its increasing focus on student loans.
Although the CFPB began overseeing the student loan servicing industry in late December 2013, it was not until May 14, 2015, that it requested “information from the public about the student loan servicing practices that may make it harder to get ahead of your debt.” That same day, it held a field hearing on student loan debt in Milwaukee, Wisconsin, and by the deadline for responding to its request for information, the CFPB received thousands of comments from aggrieved borrowers.
More recently, the CFPB highlighted its increasing focus on student loans by entering into an $18.5 million consent order with Discover Bank and two of its subsidiaries (collectively, “Discover”). The consent order relates to Discover’s student loan servicing practices between January 2011 and January 2014, and it accuses Discover of: (1) failing to provide borrowers with the forms necessary to deduct the interest on their student loans, (2) overstating borrowers’ minimum payment amounts, (3) initiating collection calls at inconvenient hours, and (4) failing to comply with requirements in the Fair Debt Collection Practices Act (FDCPA) regarding initial contacts with borrowers whose loans were in default at the time Discover began servicing them.
With regard to Discover’s tax information policies, the consent order alleges that Discover did not provide borrowers with Forms 1098-E unless the borrowers had first submitted Forms W-9S certifying that their student loans were used exclusively for qualified higher-education expenses. Discover did not send Forms W-9S to borrowers without a Form W–9S on file, and only a message at the bottom of October and November account statements informed borrowers of Discover’s requirements. According to the CFPB, these practices resulted in Discover representing to more than 156,000 borrowers that they had not paid deductible student loan interest, and it likely resulted in many of those borrowers failing to realize the tax benefits associated with their student loans.
With regard to overstating minimum payments, the consent order alleges that Discover misrepresented minimum payment by including in borrowers’ online and paper account statements “interest accrued on loans that were still in deferment and thus not required to be paid.” According to the CFPB, Discover’s inclusion of interest accrued on loans still in deferment led to substantial overstatements in nearly 30,000 account statements sent to nearly 7,000 borrowers.
Finally, the consent order accuses Discover of placing more than 150,000 collection calls to borrowers’ cell phones before 8 a.m. or after 9 p.m., and it alleges that, when Discover made initial telephone contact with approximately 252 borrowers, it did not provide them with specific information regarding the source of their debt or their right to contest its validity, in violation of the FDCPA.
Based on the CFPB’s accusations, the consent order restrains Discover from the following:
- Placing any calls to borrowers before 8 a.m. or after 9 p.m. as determined by both the time zone of the consumer’s home address and the time zone of the consumer’s phone number. (For consumers with home addresses and phone numbers in different time zones, Discover must ensure that telephone calls to those borrowers fall within the 8 a.m. to 9 p.m. window in both locations.)
- Failing to comply with the FDCPA’s initial contact requirements.
- Misrepresenting a minimum periodic payment, the amount of interest paid by a borrower, or “any other fact material to consumers concerning the servicing of their loans.”
It then orders Discover to take the following actions:
- Send each borrower without a Form W-9S on file a copy of the form to complete along with a letter clearly explaining that Discover requires the form to issue a Form 1098-E.
- Provide a system by which borrowers can submit Forms W-9S electronically.
- Provide “clear and prominent” disclosures on its website, account statements and other notices that each borrower must complete and furnish a Form W-9S before Discover will issue a Form 1098-E.
Finally, the consent order requires Discover to set aside $16 million to provide certain borrowers: (1) free tax consultation, free tax amendment services and subsidized tax preparation services; (2) up to $150 in account credit or cash to each borrower who did not participate in certain tax programs; (3) up to $500 to each borrower who overpaid his or her student loan account; and (4) up to $142 per call for each borrower who received collection calls before 8 a.m. or after 9 p.m. If there are any funds remaining after Discover makes these payments, it must remit them to the CFPB, and the consent order also requires Discover to pay a $2.5 million civil penalty.
The consent order’s severity, coupled with the CFPB’s request for information regarding student loan servicing practices, indicates that the CFPB is taking a hard look at student loan servicers right now, and the CFPB is likely examining other student loan servicers’ practices. It is also very likely that the CFPB will announce extensive student loan servicing regulations in the coming months, and the CFPB’s July 22, 2015, consent order undoubtedly provides a preview of their content. Accordingly, student loan servicers would be well-advised to take a hard look at the consent order and implement its requirements before they, too, find themselves under investigation.