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The CFPB has entered into a Consent Order with Wells Fargo Bank, N.A. asserting that it engaged in unfair and deceptive practices related to its student loan servicing practices. Specifically, the CFPB contended that Wells Fargo’s payment allocation and payment aggregation practices were unfair and deceptive and that it engaged in unfair practices related to credit reporting and late fees. Wells Fargo self-reported the issues to the CFPB and agreed to the consent order without any admission of liability. The Consent Order requires Wells Fargo pay a $3.6 million monetary civil penalty, pay $410,000 in compensation to affected consumers and perform certain remedial acts.
According to the Consent Order, in 1999, Wells Fargo consolidated its monthly billing process such that it began grouping together consumers’ student loans serviced by Wells Fargo on one invoice when they shared the same due date. As a result, the consumer would receive one monthly billing statement which contained a single payment coupon. Wells Fargo, however, continued to treat each loan as a separate loan. Problems arose when a consumer made a partial payment and did not specify to which loan it should be applied. In those instances, Wells Fargo applied it first to any delinquent loans and then pro rata across the grouped loans. The net result was each of the grouped loans was delinquent and separate late charges were assessed on each loan. The CFPB took issue with the fact that Wells Fargo provided limited information to consumers about the potential consequences of making a partial payment and did not disclose to consumers that they could make a payment on any of the grouped loans and direct Wells Fargo to allocate the payment to that loan. Additionally, the CFPB took issue with the fact that Wells Fargo did not disclose to consumers its methodology for applying partial loan payments. The CFPB concluded that Wells Fargo’s “failure to disclose its payment allocation methodology to consumers and the ability to provide payment instructions on how to allocate payments, while allocating Partial Payments towards Grouped Accounts in a manner that maximized late fees incurred by many consumers, caused or was likely to cause substantial injury to consumers.” Consent Order, ¶ 23.
Additionally, in 2000, Wells Fargo began manually aggregating multiple payments made within a billing cycle, including any overpayments from the prior cycle. The CFPB found issues with the manual system which resulted in bank errors in reviewing and processing accounts. As a result, some consumers incurred erroneous late payments and had their accounts erroneously reported to the consumer reporting agencies. The CFPB concluded that Wells Fargo’s “failure to aggregate multiple Partial Payments submitted by consumers within the same billing cycle, where payments, if aggregated, would have satisfied the total amount due for the loan’s billing cycle, and its failure to refund or waive any resulting improper fees assessed, cause or was likely to cause substantial injury to consumers.” Consent Order, ¶ 46. Similarly, the CFPB found that Wells Fargo’s “failure to update or correct inaccurate credit reports for consumers who submitted multiple Partial Payments and Overpayments that, when they were aggregated…constituted an Eligible Payment, and whose student loan accounts, as a result of such aggregation, reflected receipt of an Eligible Payment, also caused or was likely to case substantial injury to consumers” and violated the FCRA. Consent Order, ¶ 47, ¶ 50-52.
The CFPB also found additional issues with Wells Fargo’s late fee assessment practices. Specifically, a system coding error "caused the daily late fee monitoring report to omit student loan accounts for consumers who made an Eligible Payment, inclusive of any amount in arrears, on the last day of the applicable Grace Period.” Wells Fargo self-reported this issue; however, the CFPB found that the erroneous late fees were never waived or refunded to the consumer.
As remediation, the CFPB required the bank to:
According to the Consent Order, in 1999, Wells Fargo consolidated its monthly billing process such that it began grouping together consumers’ student loans serviced by Wells Fargo on one invoice when they shared the same due date. As a result, the consumer would receive one monthly billing statement which contained a single payment coupon. Wells Fargo, however, continued to treat each loan as a separate loan. Problems arose when a consumer made a partial payment and did not specify to which loan it should be applied. In those instances, Wells Fargo applied it first to any delinquent loans and then pro rata across the grouped loans. The net result was each of the grouped loans was delinquent and separate late charges were assessed on each loan. The CFPB took issue with the fact that Wells Fargo provided limited information to consumers about the potential consequences of making a partial payment and did not disclose to consumers that they could make a payment on any of the grouped loans and direct Wells Fargo to allocate the payment to that loan. Additionally, the CFPB took issue with the fact that Wells Fargo did not disclose to consumers its methodology for applying partial loan payments. The CFPB concluded that Wells Fargo’s “failure to disclose its payment allocation methodology to consumers and the ability to provide payment instructions on how to allocate payments, while allocating Partial Payments towards Grouped Accounts in a manner that maximized late fees incurred by many consumers, caused or was likely to cause substantial injury to consumers.” Consent Order, ¶ 23.
Additionally, in 2000, Wells Fargo began manually aggregating multiple payments made within a billing cycle, including any overpayments from the prior cycle. The CFPB found issues with the manual system which resulted in bank errors in reviewing and processing accounts. As a result, some consumers incurred erroneous late payments and had their accounts erroneously reported to the consumer reporting agencies. The CFPB concluded that Wells Fargo’s “failure to aggregate multiple Partial Payments submitted by consumers within the same billing cycle, where payments, if aggregated, would have satisfied the total amount due for the loan’s billing cycle, and its failure to refund or waive any resulting improper fees assessed, cause or was likely to cause substantial injury to consumers.” Consent Order, ¶ 46. Similarly, the CFPB found that Wells Fargo’s “failure to update or correct inaccurate credit reports for consumers who submitted multiple Partial Payments and Overpayments that, when they were aggregated…constituted an Eligible Payment, and whose student loan accounts, as a result of such aggregation, reflected receipt of an Eligible Payment, also caused or was likely to case substantial injury to consumers” and violated the FCRA. Consent Order, ¶ 47, ¶ 50-52.
The CFPB also found additional issues with Wells Fargo’s late fee assessment practices. Specifically, a system coding error "caused the daily late fee monitoring report to omit student loan accounts for consumers who made an Eligible Payment, inclusive of any amount in arrears, on the last day of the applicable Grace Period.” Wells Fargo self-reported this issue; however, the CFPB found that the erroneous late fees were never waived or refunded to the consumer.
As remediation, the CFPB required the bank to:
- Adopt and implement reasonable written policies and procedures concerning the accuracy and integrity of information concerning student loan accounts that is furnished to consumer reporting agencies;
- On or with all Repayment Schedules provided to a consumer before billing statements are sent on a grouping of consumer’s loans:
- A statement that the bank will accept partial statements;
- A statement and explanation of how partial payments will be allocated among grouped accounts in the absence of consumer instructions to the contrary, including examples; and
- A statement that the consumer can direct payments to any of the specific loans in the Grouped Accounts with clear instruction on how to do so, including examples.
- On or with each billing statement and on all consumer facing web pages:
- Clearly and prominently disclose the basic principles of the bank’s payment application and allocation methodologies, including those regarding partial payments; and
- A statement that the consumer can direct payments to any loan included within the consumer’s Grouped Accounts, along with instructions of how to do so and a description of the potential consequences.
- Correct all inaccurate credit reporting regarding consumers affected by the payment allocation and aggregation errors;
- Notify each affected consumer about this consent order and the potential that their credit was inaccurately reported and the actions taken by the bank to correct the same; and
- Unless instructed otherwise, the bank will continue to allocate partial payments for consumers with Grouped Accounts where all payments are current in a manner so as to maximize the number of loans within the Grouped Account on which a full payment can be made.
The Order will remain in effect for five years and additionally requires periodic reporting by the bank, as well as retention of certain records.
The Key Take-Aways for Banks of All Sizes?
The Key Take-Aways for Banks of All Sizes?
- It is imperative to clearly disclose the methodology for application of payments and the implications of partial payments;
- Manual systems are fraught with error and the converse, automated systems need to be continually tested for errors;
- The Order is consistent with the recent guidelines issues by the CFPB and Department of Education, requiring student loan servicers to apply partial payments in a manner that satisfies the amount due on as many loans loans as possible unless the consumer directs otherwise; and
- The CFPB is very focused on credit reporting systems and policies.
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