In late August, the Consumer Financial Protection Bureau took action against
Wells Fargo for illegal private student loan servicing practices. The
practices resulted in increased costs and unfair penalties for certain
student loan borrowers. Additionally, the CFPB identified failures in
Wells Fargo’s servicing process. These failures included: (1) failing
to provide important payment information to consumers; (2) charging consumers
illegal fees; and (3) failing to update inaccurate credit report information.
Wells Fargo is a national bank headquartered in Sioux Falls, South Dakota.
It is an insured depository institution with assets greater than $10,000,000
within the meaning of 12 U.S.C §5515(a). It is the second-largest
private student lender in the United States and its education division,
Education Financial Services, currently serves approximately 1.3 million
consumers in all 50 states. Education Financial Services both originates
and services private student loans.
In its consent order, the CFPB identified four law violations: (1) unfair
and deceptive practices related to payment allocation in violation of
Sections 1031 and 1036 of the Consumer Financial Protection Act of 2010
(CFPA); (2) unfair practices related to payment aggregation in violation
of Sections 1031 and 1036 of the CFPA; (3) unlawful practices related
to payment aggregation in violation of Section 623 of the Fair Credit
Reporting Act (FCRA); and (4) unfair practices related to the assessment
of late fees in violation of Sections 1031 and 1036 of the CFPA. According
to the CFPB, Wells Fargo failed to provide the level of student loan servicing
that borrowers are entitled to under the law.
The CFPB found that Wells Fargo violated the Dodd-Frank Wall Street Reform
and Consumer Protection Act in several ways. Wells Fargo represented on
its billing statements that a consumer’s student loans would not
be advanced if the consumer made a partial payment for the consumer’s
grouped account. However, if a consumer made a partial payment that was
sufficient to cover at least one of the loans in the consumer’s
grouped account and directed Wells Fargo to allocate that payment to the
loan, then Wells Fargo would advance the next payment due for the loan
and would not assess a late fee. Wells Fargo did not disclose these facts
to borrowers and therefore the representations made by it were material
and likely to mislead reasonable consumers.
The CFPB also found that Wells Fargo process payments in a way that maximized
fees for many consumers. If a borrower made a payment that was insufficient
to cover the total amount due for all loans in an account, the bank divided
the amount paid in a way that maximized fees instead of satisfying payment
for some of the loans. Borrowers were not informed as to how Wells Fargo
allocated payments across multiple loans and were unable to effectively
manage their accounts and minimize fees. The bank also charged illegal
late fees, specifically to those consumers who made payments on the last
day of their grace periods. It also charged students who chose to pay
their loan payments in multiple partial payments.
Pursuant to the Consent Order, Wells Fargo was ordered to pay $410,000
in consumer refunds and $3.6 million in civil penalties. Additionally,
it must improve student loan servicing practices and allocate partial
payments made by a borrower in a manner that satisfies the amount due
for as many loans in an account as possible. Wells Fargo must also improve
consumer billing disclosures and correct errors on credit reports.