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Discover Faces Investigation Into Student Loan Debt Collection Practices Amid Rising Delinquencies

The bank's student loan business has almost doubled in two years and is facing heat from regulators.

Posted on February 25, 2014, at 12:46 p.m. ET

Discover Financial Services, one of the biggest providers of private student loans, is facing an investigation from the Consumer Financial Protection Bureau over its loan servicing practices, the company disclosed in its annual report today. Discover said that the consumer financial regulator issued a "civil investigative demand" seeking "documents and information regarding certain of Discover Bank's student loan servicing practices."

The CFPB's investigation of Discover is just one investigation of the collection and servicing practices of the private student loan industry. Illinois Attorney General Lisa Madigan is investigating student loan giant SLM Corp, otherwise known as Sallie Mae, according to the Wall Street Journal.

While Discover's student lending business has been growing, so have its delinquencies, necessitating more intensive servicing and collection efforts, and possibly sparking the CFPB's investigation. Discover had almost $4 billion in private student loans that it originated by the end of 2013, an increase of nearly $1 billion from a year prior and nearly quadruple from the end of 2010. Combined with loans it acquired, Discover has over $8 billion in student loans compared with $4.7 billion in 2011.

Via Bloomberg

With the big jump in its private student lending, its delinquencies have also risen. At the end of last year, Discover's originated student loans had a 30-day delinquency rate of 1.66%, up from 1.07% at the end of last year and .63% from the end of 2011. It also restructured more of its student loans in 2013, with the restructuring rate going up by almost half over the year. The 90-day delinquencies for private student loans it originated have more than tripled in the past two years, at .46% at the end of this year from .14% at the end of 2011.

In contrast, Discover's credit card delinquencies have been on a steady decline over the past four years.

Only $524 million of Discover's $7 billion in interest income in 2013 came from private student loans.

Discover isn't the only financial company to see student loans detioriate in its portfolio, both Wells Fargo and Sallie Mae have as well.

Discover has recently made a big push into student lending in an effort to diversify from its credit card business. The company bought $2.5 billion in student loans from Citi and purchased Citi's 80% stake in student lender Student Loan Corp in 2010.

Large consumer banks have started to abandon the private student loan business as it has shrunk thanks to an expanded government role. The lenders that do remain face increasing scrutiny from the Consumer Financial Protection Bureau, which also examines nonbank companies that service student loans. That leaves more and more of it to speciality lenders like Sallie Mae and upstarts like Discover. JPMorgan Chase, the country's largest bank by assets, announced last year it was leaving the student loan business.

The company also disclosed that the Federal Deposit Insurance Corporation had notified Discover of possible deficiencies in its anti-money laundering program. Discover said it was cooperating with both investigations.

The bank did not have any "material" litigation expense for 2013, but disclosed that its "reasonably possible losses" for litigation and regulatory actions is up to $150 million. The bank said it could face civil penalties from the FDIC or CFPB or restitution to students in the servicing investigation.

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