The Consumer Financial Protection Bureau said Monday that Wells Fargo had engaged in illegal student loan servicing practices by processing payments to maximize late fees.
Wells agreed to pay a $3.6 million penalty and at least $410,000 to compensate borrowers who were charged illegal late fees during a two-year period from 2010 to 2012. Wells also was ordered to improve its consumer billing disclosures and to correct errors on credit reports.
The CFPB said Wells did not disclose to borrowers how it allocated payments to accounts with multiple loans or when partial payments were made. Some borrowers were improperly charged late fees when they made payments on the last day of a grace period.
"Wells Fargo hit borrowers with illegal fees and deprived others of critical information needed to effectively manage their student loan accounts," CFPB Director Richard Cordray said in a statement. "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."
Wells said it flagged the problems and self-reported on the payment aggregation and allocation issues in 2011 and 2012 and revised its practices before a supervisory exam.
"Today's consent order with the CFPB resolves three areas of concern cited by the Bureau related to legacy payment procedures that were retired or improved many years ago, and addresses the impact to a small number of customers," Wells spokesman Jason Vasquez said in a statement.
Wells was ordered to allocate partial payments made by borrowers in a manner that satisfies the amount due for as many loans as possible, unless the borrowers says otherwise. Wells also must also explain on billing statements how the bank applies and allocates payments and how borrowers can direct specific payments to any loans in their account.
Wells also must remove negative information that has been inaccurately or incompletely provided to credit bureaus.
Student loans are the nation's second-largest consumer debt market, which has grown rapidly in the last decade. The total volume of outstanding student loans has more than doubled, from less than $600 billion in 2006 to more than $1.3 trillion.
Eight million student loan borrowers are currently in default on $110 billion in student loans. In a press release the CFPB said that is "a problem that may be driven by breakdowns in student loan servicing."
Though private student loans make up just $100 billion of total outstanding student debt, the CFPB found that private student loans are generally used by borrowers with high levels of debt who also have federal loans.
Last year the CFPB found "widespread servicing failures" by both private and federal student loan servicers and urged new rules to protect borrowers. A report by the CFPB found a "range of sloppy, patchwork practices that can create obstacles to repayment, raise costs, cause distress and contribute to driving struggling borrowers to default."