Well Fargo to Pay $3.6 Million for Illegal Student Loan Practices

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.