Wells Fargo to Pay Civil Penalty, Issue Refunds for Illegal Student Loan Servicing Practices

The practices included not providing important payment information, charging illegal fees, and not updating inaccurate credit report information

Wells Fargo to Pay Civil Penalty, Issue Refunds for Illegal Student Loan Servicing Practices
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August 22, 2016

The Consumer Financial Protection Bureau (CFPB) is taking action against Wells Fargo Bank for certain illegal student loan servicing practices that raised costs and, in certain cases, unfairly penalized student loan borrowers.

The bank must improve how it bills consumers and processes student loan payments; refund $410,000 to borrowers; and pay the CFPB a civil penalty of $3.6 million.

"Wells Fargo hit borrowers with illegal fees and deprived others of critical information needed to effectively manage their student loan accounts," said CFPB Director Richard Cordray. "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."

The CFPB alleges that the bank did not provide the level of servicing for student loans that consumers are entitled to receive under the law. Due to breakdowns that occurred throughout its servicing process, thousands of consumers who borrowed student loans experienced problems with those loans or were misinformed about available payment options. The specific laws broken by Wells Fargo include the Fair Credit Reporting Act as well as the Dodd-Frank Wall Street Reform and Consumer Protection Act's prohibitions of acts and practices that are unfair and deceptive.

In processing payments made on student loans, the way the bank processed them allowed consumers to be charged maximum fees. If a borrower made a payment that was less than the total amount due on all the loans in an account, Wells Fargo divided the payment across the loans so that late fees were maximized instead of allowing payments for some of the loans to be satisfied. In addition, it did not do enough to inform the consumer of this method of allocating payments across numerous loans, nor of the fact that consumers can instruct the bank how to allocate payments on loans in their accounts. These practices made consumers unable to manage their student loan accounts effectively so as to minimize costs and fees.

The bank also made misrepresentations in the billing statements it issued to borrowers that may have resulted in a higher loan cost. It incorrectly informed borrowers that it would not satisfy any loan in an account if they paid less than the total amount due in a billing cycle. However, partial payments can indeed satisfy at least one loan payment in an account that has multiple loans. Misinforming borrowers in this manner may have discouraged them from making such partial payments and resulted in certain late fees or delinquency rather than satisfaction of one or more loans.

Consumers were charged late fees as well even when they had made timely payments. The illegal fees were charged to those customers who made their payments on the last day of their grace period, as well as to students who chose to use several partial payments instead of one lump-sum payment to satisfy the monthly amount due.

Finally, Wells Fargo did not update and correct inaccurate and negative information to be reported to credit reporting companies regarding certain borrowers who chose or had to make either partial payments or overpayments, resulting in either potential damage to a consumer's ability to use credit or making it more expensive to borrow.

The Dodd-Frank Act gives the CFPB authority to take action against institutions that engage in such deceptive or unfair practices. Wells Fargo must fulfill several requirements laid out in the CFPB's consent order.

One requirement is that the bank refunds consumers $410,000 to compensate them for the illegal late fees it charged. Included in this stipulation is refunding fees charged due to the following: the bank's non-disclosure of its payment allocation practices across multiple loans in one account; its failure to let consumers know that they could provide instructions to the bank about how they wanted payments allocated; its non-combination of any partial payments made by the borrower in the same billing cycle; and borrowers making one or more payments on the final day of their grace period.

Wells Fargo also has to amend its servicing practices for student loans by allocating partial payments so that the payments will satisfy the amount due on as many loans in one account as possible unless instructed by the borrower to do otherwise. This may reduce the numbers of late fees charged to borrowers and of delinquent loans in an account. Furthermore, it must provide improved disclosures with billing statements to customers, disclosures explaining the methods used by the bank to apply and allocate payments as well as how the borrower can instruct the bank to allocate the payments.

Finally, the bank must correct any inaccurate or incorrect student loan information provided on credit reports to consumer reporting companies, and it must pay the CFPB a civil penalty of $3.6 million.