If this is the last act of Richard Cordray’s Consumer Financial Protection Bureau, it’s a doozy. The bureau announced Wednesday it was suing Navient, formerly Sallie Mae, for allegedly deceiving student loan borrowers about their rights during repaying. The state of Illinois also announced it had sued Navient on Wednesday, alleging similar mistreatment of borrowers.
(Note: This story was updated at 3 p.m. ET with comments from Navient)
Navient services 12 million loans, including 6 million under contract with the Department of Education – a total of $300 billion worth of loans. The CFPB says Navient deceptively managed loan servicing, and specifically alleges that the firm “cheated” struggling borrowers out of their rights to lower payment plans. The firm “systematically and illegally fail(ed) borrowers at every stage of repayment,” the CFPB alleged in the lawsuit, filed in a Pennslyvania federal court.
In a statement, Navient denied the allegations, saying they were “unfounded,” and questioned the timing of the lawsuit announcement. The firm said it had rejected an ultimatum from the bureau that it settle the lawsuit or be suing before the inauguration.
“The timing of this lawsuit—midnight action filed on the eve of a new administration—reflects their political motivations,” Navient said to me in an email.
CFPB director Cordray is widely expected to be replaced when Donald Trump takes office, and replaced by an executive who opposes aggressive enforcement actions.
“For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans,” said CFPB Director Richard Cordray. “At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today’s action seeks to hold them accountable.”
The lawsuit focuses on income-based repayment plans that allow borrowers to tie monthly payments to their post-graduation income. Earlier, the CFPB had warned that services were making it to hard for borrowers to qualify for the plans, and also making it hard for borrowers to renew their lower payments. A year ago, I wrote about a borrower whose payment jumped from $200 to $1,400 when faced with that issue.
The CFPB lwsuit accuses Navient of steering borrowers towards loan forbearance and away from income-based plans. Forbearance, which allows borrowers to miss payments but results in accumulating interest, is more profitable for Navient, the CFPB says. A staggering 1.5 million borrowers utilized two or more consecutive forbearance periods from 2010-2015, the CFPB says. Many of them would have been better off in income-based payment plans — “a large number would have qualified instead for a $0 payment in an income-driven repayment plan at that time,” the CFPB says.
Navient benefited dramatically from withholding good advice, the CFPB alleges.
“At the conclusion of those forbearances, Navient had added nearly $4 billion dollars of unpaid interest to the principal balance of their loans,” the agency says in its lawsuit. “For many of these borrowers, had they been enrolled in an income-driven repayment plan, they would have avoided much or all of their additional charges because the government would have paid the unpaid interest on their subsidized loans in full during the first three years of consecutive enrollment.’
Illinois Attorney General Lisa Madigan said borrowers in her state had run into similar roadblocks when looking for help paying back their loans.
“My investigation found that Navient failed to perform core loan servicing duties properly on both federal student loans and private loans,” Madigan said when discussing her case, filed Cook County, Illinois. “In spite of encouraging borrowers to call Navient for help when they were struggling to pay their loans, Navient repeatedly failed to tell those borrowers about affordable repayment plans that were available to them.”
The CFPB suit also notes that 60 percent of borrowers who had enrolled in income-based plans failed to renew them, resulting in large monthly payment increases, a sign that something was wrong with the renewal process. The CFPB alleges that renewal notices were sent in emails that were designed not to be read or noticed.
“The subject line of the email simply read: ‘Your Sallie Mae Account Information.’ (or) … ‘New Document Ready to View,'” the lawsuit says.
The lawsuit alleges violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act.
The CFPB is seeking refunds for consumers harmed by Navient’s alleged illegal practices.
Navient denied the CFPB’s allegations, saying it had rejected an “ultimatum” that required it to agree to “false assertions.”
“Navient welcomes clear and well-designed guidelines that all parties can follow, and we had hoped our extensive engagement with the regulators would achieve this objective. Instead, the suit improperly seeks to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer,” it said. “The regulator-asserted standards are inconsistent with Department of Education regulations, and will harm student loan borrowers, including through higher defaults.”
Here is a list of allegations provided by the CFPB. Below it are a list of assertions by Navient.
- Fails to correctly apply or allocate borrower payments to their accounts: As soon as a borrower begins to pay back their loans, student loan servicers are supposed to take a borrower’s payment and follow instructions from the borrower about how to apply it across their multiple loans. Navient repeatedly misapplies or misallocates payments — often making the same error multiple times over many months. The company all too often fails to correct its errors unless a consumer discovers the problem and contacts the company.
- Steers struggling borrowers toward paying more than they have to on loans: When borrowers run into trouble repaying their federal student loans, they have a right under federal law to apply for repayment plans that allow for a lower monthly payment. But the Bureau believes that Navient steers many borrowers into forbearance, an option designed to let borrowers take a short break from making payments. But interest continues to add up during forbearance. Certain consumers with subsidized loans end up paying a heavy price because they could have potentially avoided those interest charges. From January 2010 to March 2015, the company added up to $4 billion in interest charges to the principal balances of borrowers who were enrolled in multiple, consecutive forbearances. The Bureau believes that a large portion of these charges could have been avoided had Navient followed the law.
- Obscured information consumers needed to maintain their lower payments: Borrowers who successfully enroll in an income-driven repayment plan need to recertify their income and family size annually. But Navient’s emails and annual renewal notice sent to borrowers failed to adequately inform them of critical deadlines or the consequences if they failed to act. Navient also obscured its renewal notices in emails sent to borrowers that did not adequately alert them about the need to renew. Many borrowers did not renew their enrollment on time and they lost their affordable monthly payments, which could have caused their monthly payments to jump by hundreds or even thousands of dollars. When that happens, accrued interest is added to the borrower’s principal balance, and these borrowers may have lost other protections, including interest subsidies and progress toward loan forgiveness.
- Deceived private student loan borrowers about requirements to release their co-signer from the loan: Navient told borrowers that they could apply for co-signer release if they made a certain number of consecutive, on-time payments. Even though it permits borrowers to prepay monthly installments in advance and tells customers who do prepay that they can skip upcoming payments, when borrowers did so, Navient reset the counter on the number of consecutive payments they made to zero. So borrowers who tried to get ahead of their loans and prepay would have been denied co-signer release and had to start over.
- Harmed the credit of disabled borrowers, including severely injured veterans: Student loan payments are reported to credit reporting companies. Severely and permanently disabled borrowers with federal student loans, including veterans whose disability is connected to their military service, have a right to seek loan forgiveness under the federal Total and Permanent Disability discharge program. Navient misreported to the credit reporting companies that borrowers who had their loans discharged under this program had defaulted on their loans when they had not. This potentially caused damage to their credit reports.
And here are Navient’s assertions:
“Navient has a well-established, superior track-record of helping student loan borrowers succeed in repayment.”
- 49 percent of loan balances serviced by Navient for the federal government are enrolled in income-driven repayment plans. Assertions that we do not educate borrowers about IDR plans ignore the facts.
- Navient is a leader in advancing policy recommendations to streamline enrollment and reenrollment in income-driven plans—reforms which we believe would make a meaningful difference for millions of Americans with student loans.
- Federal borrowers serviced by Navient are 31 percent less likely to default than their peers at other servicers. Private loan delinquencies and defaults are at among historic lows.
- In 2009, Navient pioneered the first private education loan modification program. The program was designed to help customers stay current on their loans and, unlike federal program solutions, make progress on repaying their principal balance. Today, more than $2 billion in loan balances are enrolled in these programs.
“Navient has a responsibility to its customers, shareholders, and employees to defend itself—publicly and in court—against this unsubstantiated, unjustified and politically driven action,” it said. “We cannot and will not accept agenda-driven ultimatums designed to get headlines rather than help for student borrowers. We will vigorously defend against these false allegations and continue to help our customers achieve financial success.”
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