(Adds details about conduct, comment from Wells Fargo)
By Suzanne Barlyn
Aug 22 (Reuters) - A Wells Fargo & Co unit will pay $4.1 million to settle allegations that it engaged in illegal private student loan servicing practices that unfairly penalized certain borrowers, the Consumer Finance Protection Bureau (CFPB) said on Monday.
The bureau said it identified breakdowns throughout Wells Fargo's servicing process, including failing to provide important payment information to consumers, charging illegal fees and failing to update inaccurate credit report information.
Wells neither admitted nor denied the charges, the bureau said.
The settlement resolves three areas of concern related to "procedures that were retired or improved many years ago, and addresses the impact to a small number of customers," a Wells Fargo spokesman said. The procedures at issue were either retired or corrected between 2011 and 2013.
The $4.1 million sum includes a $3.6 million penalty to the bureau and a $410,000 fund for borrowers.
Last year, the CFPB found that more than 8 million U.S. borrowers are in default on more than $110 billion in student loans. Breakdowns in student loan servicing may be driving the problem, the bureau said.
Student loans make up the second largest U.S. consumer debt market with roughly $1.3 trillion owed by borrowers who took out federal and private loans, the bureau said.
Loans from private lenders are a small fraction of that amount, totaling about $100 billion owed. But they are often used by borrowers with high debt levels who also have federal loans, the CFPB said.
The bureau said the bank processed payments in a way that made consumers pay more fees. If a borrower's payment was not enough to cover the total amount due for all loans in an account, the bank divided that payment among the loans in a way that maximized late fees rather than satisfying payments for some of the loans, the bureau said.
Wells Fargo's Sioux Falls, South Dakota-based education finance unit services about 1.3 million U.S. consumers, the CFPB said. (Reporting by Suzanne Barlyn; Editing by Alan Crosby, Bernard Orr)