Wells Fargo headquarters in San Francisco. (Photo: AP)

The Consumer Financial Protection Bureau has charged Wells Fargo Bank with illegal servicing of private student loans and fined the bank $3.6 million in civil penalties plus an additional $410,000 to reimburse affected borrowers.

“Wells Fargo hit borrowers with illegal fees and deprived others of critical information needed to effectively manage their student loan accounts,” said CFPB Director Richard Cordray in a statement. “Consumers should be able to rely on their servicer to process and credit payments correction and to provide accurate and timely information.”

The problems at Wells Fargo, the nation’s second largest private student loan lender, had their origins in a procedural change at the bank, when it combined all of a borrower’s loans into one monthly billing statement and included a single payment coupon for the group.  Before then, borrowers were given a coupon for each loan.

Under the single payment coupon procedure, if a borrower made a partial payment and did not designate how to allocate the payment among all loans in the group, the bank allocated the payment evenly across all the borrower’s outstanding student loans, according to the CFPB. If the allocation to a loan failed to meet the minimum payment due, the bank charged the borrower a late fee for that loan and any other loans similarly affected and reported the loans as delinquent to consumer credit agencies.

The problem, according to the CFPB, was that borrowers didn’t know about these procedures. The bank “failed to adequately disclose to consumers how it allocated payments across multiple loans, and that consumers have the ability to provide instructions for how to allocate payments.”

Moreover, the bank “incorrectly told borrowers that paying less than the full amount due in a billing cycle would not satisfy any obligation on the account … [when] a partial payment may satisfy at least one payment in an account” and certain borrowers were charged late fees even though their payments were on time, according to the CFPB. The latter included consumers who paid on the last day of their grace periods and students who made multiple partial payments, instead of one single payment, within a month. These problems occurred sometime between early 2010 and March 2013. In addition to $410,000 compensation to borrowers and $3.6 million civil penalty, the CFPB ordered Wells Fargo to allocate partial payments for student loans in a way that “satisfies the amount due for as many loans a possible unless directed otherwise by a borrower” in order to reduce the number of delinquent loans and late fees.

The CFPB also ordered Wells Fargo to provide borrowers “enhanced disclosures to consumer about billing statements” which explain how the bank allocates payments and how borrowers can direct payments to specific loans and correct errors on credit reports.

In response to these charges, Wells Fargo said in a statement that “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.”

The bank did not specify the number of borrowers affected, but it has approximately 1.3 million student loan borrowers across the 50 states, according to the CFPB.

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