CORPORATION, AND DISCOVER PRODUCTS, INC.
2015-CFPB-0016Document 1Filed 07/22/2015Page 1 of 28UNITED STATES OF AMERICACONSUMER FINANCIAL PROTECTION BUREAUADMINISTRATIVE PROCEEDING2015-CFPB-0016In the Matter of:CONSENT ORDERDISCOVER BANK, THE STUDENT LOANCORPORATION, AND DISCOVERPRODUCTS, INC.The Consumer Financial Protection Bureau (Bureau) has reviewed certainstudent-loan-servicing activities of Discover Bank, The Student Loan Corporation, andDiscover Products, Inc. The Bureau has identified the following violations of law: (1)unfair and deceptive acts and practices relating to Respondent's failure to furnish clearinformation regarding the student-loan interest consumers paid, in violation of§§1031(a) and 1036(a)(1)(B) of the Consumer Financial Protection Act of 2010 (CFPA), 12U.S.C. §§ 5531, 5536(a); (2) unfair acts and practices relating to Respondent initiatingcollection calls to consumers at inconvenient times, in violation of §§ 1031(a) and1036(a)(1)(B) ofthe CFPA, 12 U.S.C. §§ 5531, 5536(a); (3) deceptive acts and practicesrelating to Respondent overstating the minimum amount due in student-loan billingstatements, in violation of§§ 1031(a) and 1036(a)(1)(B) of the CFPA, 12 U.S.C. §§ 5531,5536(a); and (4) violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, etseq., in Respondent's collection activities regarding defaulted student loans it acquired.Under§§ 1053 and 1055 of the CFPA, 12 U.S.C. §§ 5563,5565, the Bureau issues thisConsent Order (Consent Order).
2015-CFPB-0016Document 1Filed 07/22/2015Page 2 of 28IJurisdiction1.The Bureau has jurisdiction over this matter under §§ 1053 and 1055 of theCFPA, 12 U.S.C. §§ 5563,5565.IIStipulation2.Respondent has executed a "Stipulation and Consent to the Issuance of aConsent Order," dated July 16, 2015, which is incorporated by reference and is acceptedby the Bureau. By this Stipulation, Respondent has consented to the issuance of thisConsent Order by the Bureau under §§ 1053 and 1055 of the CFPA, 12 U.S.C. §§ 5563,5565, without admitting or denying any of the findings of fact or conclusions of law,except that Respondent admits the Bureau has jurisdiction over it and the subjectmatter of this action.IIIDefinitions3·The following definitions apply to this Consent Order:a. "Affected Consumers" means the Call-Time Consumers, the MinimumPayment Consumers, and the Tax-Information Consumers.b. "Attempted Call or Contact" means an instance in which Respondentplaced a telephone call to a consumer's phone number that resulted in aconnection to consumer's telephone, whether or not the consumeranswered the call.c. "Board" means the duly-elected and acting Board of Directors of DiscoverBank.d. "Clearly and prominently" means:2
2015-CFPB-00161.Document 1Filed 07/22/2015Page 3 of 28in textual communications (e.g., printed publications orwords displayed on the screen of an electronic device), the disclosure mustbe of a type size and location sufficiently noticeable for an ordinaryconsumer to read and comprehend it, in print that contrasts with thebackground on which it appears;n.in communications made through interactive media such asthe internet, online services, and software, the disclosure must beconspicuously presented in a form consistent with subsection (i).e. "Call-Time Consumers" means consumers who received 6 or moreAttempted Calls or Contacts before 8 a.m. or after 9 p.m. in the time zoneof their address.f. "Defaulted Student Loans" means those Acquired Loans (as defined inSection IV.7 below) that were in charged-off status at the time Respondentacquired them.g. "Effective Date" means the date on which the Consent Order is issued.h. "Enforcement Director" means the Assistant Director of the Office ofEnforcement for the Consumer Financial Protection Bureau, or his or herdelegee.1."Minimum-Payment Consumers" means consumers who received anaccount statement from Respondent with an overstated minimumpayment-due amount and did not make their monthly student-loanpayments using an auto-pay method.3
2015-CFPB-0016J.Document 1Filed 07/22/2015Page 4 of 28"Regional Director" means the Regional Director for the Midwest Regionfor the Office of Supervision for the Consumer Financial ProtectionBureau, or his or her delegee.k. "Related Consumer Action" means a private action by or on behalf of oneor more consumers or an enforcement action by another governmentalagency brought against Respondent based on substantially the same factsas described in section IV of this Consent Order.I. "Relevant Period" means the period from January 1, 2011 to January 28,2014.m. "Respondent" means Discover Bank, The Student Loan Corporation, andDiscover Products, Inc., and their successors and assigns.n. "Student-Loan Portfolio" means student loans owned by Respondent.o. "Tax-Information Consumers" means all consumers who paid Respondentmore than 6oo in interest on private student loans but who did not (1)receive a Form 1098-E; (2) request and receive an interest-paid letter fromRespondent for tax years 2011 or 2012; (3) accept Respondent's offer topay for their filing amended returns; (4) contact Ernst & Young underRespondent's program to provide tax advice and preparation services; or(5) accept Respondent's offer to pay for basic tax preparations services fora prior tax year.p. "Termination Date" is 5 years from the Effective Date or 5 years from themost recent date that the Bureau initiates an action alleging any violationof the Consent Order by Respondent.IV4
2015-CFPB-0016Document 1Filed 07/22/2015Page 5 of 28Bureau Findings and ConclusionsThe Bureau finds the following:4·Discover Bank, which is headquartered in Greenwood, Delaware, is aninsured depository institution with assets greater than 10,000,000 within the meaningof 12 U.S.C. § 5515(a).5·The Student Loan Corporation and Discover Products, Inc. are affiliates ofDiscover Bank.6.Respondent is a "covered person" under 12 U.S.C. § 5481(6).Acquired Loan Portfolio7.In a series of transactions beginning in late 2010, Respondent expandedits private Student-Loan Portfolio by acquiring substantially all of Citibank's privatestudent-loan business, including more than 8oo,ooo private student-loan accounts (theAcquired Loans).8.Since 2011, Respondent and its service providers have serviced theAcquired Loans as well as Respondent's preexisting student loans.g.Among other things, Respondent has provided borrowers with periodicaccount statements reflecting the payment due, supplied year-end tax informationregarding the student-loan interest the borrowers paid, and contacted borrowers tocollect past-due payments.Tax-Information Policies10.Respondent maintained many of Citibank's procedures and policies forservicing the Acquired Loans, including Citibank's policies regarding notice toborrowers and the Internal Revenue Service (IRS) of student-loan interest paid duringthe tax year.5
2015-CFPB-001611.Document 1Filed 07/22/2015Page 6 of 28The tax code allows student-loan interest to be deducted as an adjustmentto income for some taxpayers.12.Under the Internal Revenue Code, private student loans may be deemed"qualified education loans" for purposes of Form 1098-E reporting if the borrowercertifies that the loan proceeds will be used solely to pay for "qualified higher educationexpenses." 26 C.F.R. § 1.6osoS-3(e)(2).13.That certification may be made on a Form W-9S Request for Student's orBorrower's Taxpayer Identification Number and Certification (W-9S form) orincorporated into other documents, such as a loan application or promissory note.14.Institutions are required to provide certain notices to student-loanborrowers and the IRS regarding the amount of qualified student-loan interest theborrowers paid. They must file a Form 1098-E information return with the IRSspecifying the amount of qualified student-loan interest paid if a borrower paid morethan 6oo in such interest and has provided the applicable certification. They must alsofurnish borrowers with a statement specifying this amount if the borrower paid morethan 6oo in qualified student-loan interest. 26 C.F.R. § 1.6osoS-3(a), (c)-( d).15.With respect to the Acquired Loans, Respondent did not provide thoseborrowers with a Form 1098-E unless the borrowers had also submitted a W-gS formcertifying that the loan was used solely to pay for qualified higher-education expenses.16.Unless requested by borrowers, Respondent did not send Acquired Loanborrowers W-9S forms to complete. Nor did Respondent adequately alert borrowerswho did not have W-9S forms on file that this document was lacking and would preventthem from receiving a Form 1098-E.6
2015-CFPB-001617.Document 1Filed 07/22/2015Page 7 of 28Instead, Respondent placed a message at the bottom of the first page, oron a separate second page, of the October or November billing statements in 2011 and2012. The message indicated that borrowers would not receive a Form 1098-E unlessthey had submitted a W-gS.18.In addition, Respondent directed Acquired Loan borrowers to its websitefor online "Qualified Interest" information.19.During the Relevant Period, Acquired Loan borrowers who did not have aW-9S on file would see the following information when they accessed their onlineQualified Interest statement:Qualified InterestThis is the private student loan interest you paid to TheStudent Loan Corporation in [tax year]: o.oo20.The Qualified Interest statement reflected " o.oo" because the AcquiredLoan borrower did not have a W-9S form on file with Respondent.21.During the Relevant Period, the online Qualified Interest information ofover 156,000 Acquired Loan borrowers reflected o.oo in interest paid if the borrowerviewed the Qualified Interest portion of Discover's website, even though thoseborrowers in fact had paid Respondent student-loan interest on their private studentloans. In many instances, this occurred for both the 2011 and 2012 tax years.22.Respondent did not adequately explain to Acquired Loan borrowers thattheir online Qualified Interest statements would reveal o.oo in interest paid if noW-9Sform were on file.7
2015-CFPB-001623.Document 1Filed 07/22/2015Page 8 of 28Respondent's statement that o.oo in interest had been paid was likely tomislead borrowers into believing that they had not paid interest qualifying for the taxdeduction, potentially causing them to forego seeking this tax benefit.24.As described in paragraphs 19-23, in connection with servicing theAcquired Loans, Respondent represented, expressly or impliedly, in numerous instancesthat Acquired Loan borrowers had paid " o.oo" in student-loan interest.25.In fact, these Acquired Loan borrowers had paid Respondent student-loaninterest and often a substantial amount of interest.26.Thus, Respondent's representations as described in paragraphs 19-23constitute deceptive acts or practices in violation of§§ 1031(a) and 1036(a)(1)(B) of theCFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). .27.Respondent's tax-information practices were also unfair under the CFPA.An act or practice is unfair if it causes or is likely to cause consumers substantial injurythat is not reasonably avoidable and if the substantial injury is not outweighed bycountervailing benefits to consumers or to competition.28.Respondent's misleading Qualified Interest statements were likely to causeaffected Acquired Loan borrowers to believe they did not pay interest qualifying for thetax deduction and, consequently, to not seek this tax benefit, when in fact they may havequalified for it. This caused or was likely to cause consumers substantial injury that wasnot reasonably avoidable or outweighed by any countervailing benefit to consumers orto competition.29.Therefore, Respondent engaged in unfair acts and practices in violation of§§ 1036(a)(1)(B) and 1031(c)(1) of the CFPA. 12 U.S.C. §§ 5536(a)(1)(B), 5531(c)(l).8
2015-CFPB-0016Document 1Filed 07/22/2015Page 9 of 28Minimum-Payment-Due Statements30.For numerous Acquired Loans exiting their grace status and enteringrepayment, Respondent overstated the minimum amount due on the borrowers' onlineand paper account statements.31.The minimum payment amount Respondent presented on thosestatements included (1) the actual minimum amount due on loans in or approachingrepayment and (2) interest accrued on loans that were still in deferment and thus notrequired to be paid. Respondent's inclusion of interest accrued on loans still indeferment led to substantial overstatements of the minimum payment due in manycases.32.During the Relevant Period, Respondent overstated the minimumpayment due in nearly 30,000 account statements sent to roughly 7,000 borrowers.33.Section 1036(a)(1)(B) of the CFPA prohibits "unfair, deceptive, or abusive"acts or practices. 12 U.S.C. § 5536(a)(1)(B).34.As described in paragraphs 30-32 above, in connection with servicing theAcquired Loans, in numerous instances, Respondent represented, expressly orimpliedly, on borrower account statements an inaccurate minimum monthly paymentdue.35.In fact, the actual amounts owed by Acquired Loan borrowers under theterms of their loans were often far less than Respondent's account statements reflected.Thus, Respondent's representations as described in paragraphs 30-32 constitutedeceptive acts or practices in violation of§§ 1031(a) and 1036(a)(1)(B) of the CFPA, 12U.S.C. §§ 5531(a), 5536(a)(1)(B).9
2015-CFPB-0016Document 1Filed 07/22/2015Page 10 of 28Inappropriate Collection Call Times36.Prior to February 2013, Respondent initiated over 150,000 collection callsto the cellular phone numbers of student-loan borrowers before 8 a.m. or after 9 p.m. inthe time zone of the consumer's address.37.For borrowers whose cell phone number area code corresponded with atime zone different from the time zone of the customer's mailing address, Respondent'scollection calls frequently occurred before 7 a.m. and after 10 p.m. in the time zone ofthe consumer's address.38.Many of these consumers may have received multiple collection calls atthese inconvenient times. Over 1,000 consumers received dozens of calls atinconvenient hours.39.Under the CFPA, an act or practice is unfair if it causes or is likely to causeconsumers substantial injury that is not reasonably avoidable and is not outweighed bycountervailing benefits to consumers or to competition.40.Respondent's practice of placing collection calls at inconvenient times waslikely to cause substantial injury to consumers that was not reasonably avoidable oroutweighed by any countervailing benefit to consumers or to competition.41.Thus, Respondent engaged in unfair acts and practices in violation of§§1036(a)(1)(B) and 1031(c)(1) ofthe CFPA. 12 U.S.C. §§ 5536(a)(1)(B), 5531(c)(l).Defaulted Acquired Loans42.Some of the Acquired Loans-- at least 6,074 --were in charged-off statusat the time Respondent purchased them (Defaulted Acquired Loans).43.Although most Defaulted Acquired Loans were referred to third-partydebt-collection firms, others remained with Respondent for collection.10
2015-CFPB-001644.Document 1Filed 07/22/2015Page 11 of 28Respondent proceeded to collect on approximately 252 of those DefaultedAcquired Loans, making an initial communication with the borrowers by phone.45·With respect to the Defaulted Student Loans, Respondent was a "debtcollector" under the Fair Debt Collection Practices Act (FDCPA).46.Section 809 of the FDCPA requires debt collectors, such as Respondentwith respect to the Defaulted Acquired Loans, to provide consumers with specificinformation about the amount and source of the debt and the consumers' right tocontest the debt's validity. 15 U.S.C. § 1692g(a)(1)-(5). That information must beprovided during the debt collector's initial communication with the consumer or in awritten debt-validation notice sent within five days of that initial communication. 15U.S.C. § 1692g(a).47.Respondent failed to comply with those FDCPA requirements in its initialcollection contact to approximately 252 consumers.48.Therefore, Respondent violated the FDCPA, 15 U.S.C. § 1692g in its initialcollection activity regarding the Defaulted Acquired Loans.ORDERvConduct ProvisionsIT IS ORDERED, under§§ 1053 and 1055 of the CFPA, that:49 .Respondent and its officers, agents, servants, employees, and attorneysacting in the course of representing Respondent on student-loan-servicing matters whohave actual notice of this Consent Order, whether acting directly or indirectly, may notviolate, including by taking reasonable measures to ensure that its service providers,11
2015-CFPB-0016Document 1Filed 07/22/2015Page 12 of 28affiliates, and other agents do not violate,§§ 1031 and 1036 of the CFPA, 12 U.S.C. §§5531, 5536, by taking the following affirmative actions :a.Respondent, whether acting directly or indirectly, is permanentlyrestrained from:1.Placing any calls to consumers before 8 a.m. or after 9 p.m.as determined by the time zone of the consumer's knov.lJl address and thetime zone of the consumer's phone number, unless the consumer hasexpressly authorized Respondent to make calls within those time frames.To the extent Respondent has multiple addresses or phone numbers forthe consumer, Respondent must ensure that any calls made to theconsumer fall within the 8 a.m. to 9 p.m. window in each location in whichthe consumer might reside based on the address and phone informationknown to Respondent; and11.Failing to comply with the requirements of the FDCPA, 15U.S.C § 1692 et seq., including the notice provisions in 15 U.S.C. §1692g(a),with respect to any defaulted debt Respondent acquires.b. Respondent, and its officers, agents, servants, employees, and attorneyswho have actual notice of this Consent Order, whether acting directly orindirectly, in connection with servicing loans, may not misrepresent, orassist others in misrepresenting, expressly or impliedly, to consumers:1.11.m.the minimum periodic payment owed by consumers;the amount of interest paid by consumers; orany other fact material to consumers concerning theservicing of their loans.12
2015-CFPB-0016c.Document 1Filed 07/22/2015Page 13 of 28Respondent, whether acting directly or indirectly, in connection withservicing the Acquired Loans, must take the following affirmative actions:1.send Acquired Loan borrowers without IRS W-9S forms onfile with Respondent a blank W-9S form to complete; Respondent mustalso provide a system for borrowers to submit W-9S forms electronically;n.explain in a letter accompanying the blank W-9S form thatthe Respondent requires the borrower to submit theW-9S form beforeRespondent will issue them a Form 1098-E specifying the amount ofstudent-loan interest they paid;m.continue to provide clear and prominent disclosures on itswebsite, account statements, and other notices to Acquired Loanborrowers that borrowers must complete and provide Respondent with aW-9S form before Respondent will issue the borrower a Form 1098-E; and1v.submit, within ten (10) days ofthe Effective Date,Respondent's proposed website, account statement, or other notice toAcquired Loan borrowers about Respondent's W-9S form requirement tothe Enforcement Director for approval; andv.notify the Bureau within 7 days of the IRS's response toRespondent's request for a private-letter ruling as to whether the borrowercertifications in the Acquired Loan notes suffice to render the loansQualified Education Loans for purposes of the Internal Revenue Codeprovisions relating to the student-loan tax deduction. Respondent willprovide the Enforcement Director with a copy of the IRS's response,including any private-letter ruling issued by the agency.13
2015-CFPB-0016Document 1Filed 07/22/2015Page 14 of 28VICompliance PlanIT IS FURTHER ORDERED that:so.Within 90 days of the Effective Date, Respondent must submit to theRegional Director for review and determination of non-objection a comprehensivecompliance plan designed to ensure that Respondent's student-loan-servicing activitiescomply with the terms of this Consent Order (Compliance Plan). The Comp
4· Discover Bank, which is headquartered in Greenwood, Delaware, is an insured depository institution with assets greater than 10,000,000 within the meaning of 12 U.S.C. § 5515(a). 5· The Student Loan Corporation and Discover Products, Inc. are affiliates of Discover Bank. 6. Respondent
5. The Student Loan Corporation and Discover Products, Inc. are affiliates of Discover Bank, and are also service providers to Discover Bank within the meaning of 12 U.S.C. § 5481(6)(B). 2020-BCFP-0026 Document 1 Filed 12/22/2020 Page 5 of 54
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