Discover Bank to pay $18.5M over student loans

Discover Bank and affiliated companies inflated minimum payments due on student loans, deprived consumers of information required to get income tax benefits and violated federal debt collection laws, the Consumer Financial Protection Bureau said on Wednesday.

The bank was ordered to pay $16 million to borrowers and $2.5 million more in penalties.

"Discover CFPB Director Richard Cordray said in a statement. "Illegal servicing and debt collection practices add insult to injury for borrowers struggling to pay back their loans. Today's action is an important step in the Bureau's work to clean up the student loan servicing market."

Illinois-based Discover Bank, whose student loan affiliates (The Student Loan Corp. and Discover Products Inc.) were also charged by the CFPB, was accused of harassing borrowers by calling them before 8 a.m. and after 9 p.m. That's in violation of federal debt collection laws. Discover became a bigger player in the student loan arena in 2010 when the company acquired 800,000 accounts from Citibank (C).

Discover must refund $16 million to more than 100,000 consumers to cover those who have to amend tax returns because they were given no documentation of the student loan interest, compensate those who were duped into paying higher minimum payments and credit those who received off-hours collection calls.

The company was ordered to stop misrepresenting minimum payments, to send out proper student loan interest and tax documentation, and to stop calling borrowers who are overdue on payments outside the legal calling times.

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    Mitch Lipka is an award-winning consumer columnist. He was in charge of consumer news for AOL's personal finance site and was a senior editor at Consumer Reports. He was also a reporter for The Philadelphia Inquirer and the South Florida Sun-Sentinel, among other publications.