Federal Agency Fines Wells Fargo Over Student Loan Practices
Posted By Donna Fuscaldo on September 6, 2016 at 4:30 pm
So much for Amazon.com helping Wells Fargo in the student loan market. Neither company will say why, but the breakup – which comes just a few weeks after the partnership was announced – comes after the federal Consumer Financial Protection Bureau levied a $3.6 million civil penalty against Wells and ordered it to provide $410,000 in relief to borrowers. The CFPB tied the penalties to illegal student-loan servicing practices, saying the San Francisco-based bank increased costs and unfairly penalized some borrowers. The brief partnership between Amazon and Wells was designed to give the retailer’s Prime Student members a break on the interest rate for the bank’s new student loans.
Part of a crackdown on student loan practices
The CFPB has been cracking down on lenders and identified breakdowns throughout Wells Fargo’s servicing process including failing to provide important payment information to consumers, charging consumers illegal fees, and refusing to update inaccurate credit report information. In addition to the civil penalty and other relief, the CFPB ordered Wells Fargo to improve the way it bills consumers and other student loan practices. Wells Fargo did not respond to emails seeking comment.
“Wells Fargo hit borrowers with illegal fees and deprived others of critical information needed to effectively manage their student loan accounts,” CFPB Director Richard Cordray said in announcing the action. “Consumers should be able to rely on their servicer to process and credit payments correctly and to provide accurate and timely information and we will continue our work to improve the student loan servicing market.”
Wells Fargo isn’t the only student loan servicer the CFPB has called on the carpet. Experts point to the complicated nature of student loans that land consumers and loan servicers alike in trouble. “Student loan repayments are enormously, needlessly complex. It’s hard to disentangle actual cases of abuse by servicers from the cases in which there’s a miscommunication or a misunderstanding and the borrower blames his servicer,” says Preston Cooper, policy analyst at The Manhattan Institute for Policy Research. “One problem is that most borrowers take out federal loans, and so they expect to be paying the government back and are confused when a private company such as Navient or Wells Fargo contacts them. Others have taken out multiple loans, which may have multiple servicers. All this can lead to confusion and missed payments.”
Why student loan practices matter
The CFPB’s move to go after servicers over student loan practices comes at a time when the nation is collectively staring at $1.3 trillion in student loan debt. It also comes against a backdrop of rising default rates. The CFPB cited a break down in student loan servicing for some of the defaults. The government controls 90 percent of the student loan market, but private lenders also are big players, representing around $100 billion of all outstanding loans. The CFPB found private loans generally are used by borrowers who have high levels of debt and also have federal student loans. Wells Fargo serves about 1.3 million student loan borrowers around the country.
Among the problems the CFPB found at Wells Fargo are the following:
- Processing payments in ways that maximized the fees consumers had to pay. For example, the CFBP said a borrower who made a payment that wasn’t enough to cover the total amount due for all his or her loans would have the payment divided across the loans, maximizing the late fees.
- Misrepresenting the value of making partial payments by incorrectly telling borrowers that paying less than the full amount due in a billing cycle failed to satisfy any of the obligation, even a partial payment could satisfy at least one of the minimum payments for accounts with multiple loans.
- Charging illegal late fees for certain consumers even though they made on-time payments. Payments made on the last day of their grace periods were hit with late fees.
- Failing to update and correct inaccurate negative information reported to credit reporting companies on borrowers who made partial payments or overpayments. The CFPB contends the errors could damage a consumer’s ability to get a loan or make it much more expensive.
Jovan Hackley, a spokesman for Student Loan Hero, which provides calculators and tools to help students pay off their debt, says some problems could be a byproduct of increased regulation that wasn’t around when companies such as Wells Fargo got into student loan servicing. “The bank didn’t have a system in place that worked in a way that was totally beneficial to borrowers. There was no CFPB, no regulations and no guidelines when they go into the student loan game,” Hackley says. “Actions connected to the fines were from 2011 through 2013. We’ve seen a lot of change in student loan servicing since then.”