Eighteen months after Sallie Mae spin-off Navient revealed that its wholly-owned subsidiary Navient Solutions Inc could one day be on the receiving end of a federal lawsuit related to its student loans servicing practices, the day has come to pass. The Consumer Financial Protection Bureau, along with two states, filed lawsuits against the nation’s largest student loan company for allegedly cheating borrowers out of repayment rights.
The CFPB alleges in the lawsuit [PDF] that for years Navient—which services more than $300 billion in federal and private student loans for more than 12 million borrowers—engaged in a series of illegal and deceptive practices, including providing borrowers with incorrect information, processing payments erroneously, and failing to address customers’ complaints.
Additionally, the CFPB claims that Navient illegally cheated struggling borrowers out of their rights to lower repayments through federal programs, which caused them to pay much more than they had to for their loans.
According to the CFPB’s lawsuit, Navient, along with two subsidiaries—loan servicer Navient Solutions and collection arm Pioneer Credit Recovery—failed to provide the most basic functions of adequate student loan servicing at every stage of repayment for both private and federal loans.
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Misallocated Loan Payments
Specifically, the Bureau claims that Navient failed to correctly apply or allocate borrower payments to their accounts.
In many cases, the CFPB found that Navient repeatedly misapplied or misallocated payments despite explicit instruction from borrowers on how the payments should be used.
The CFPB claims that these errors occurred in two variations: allocating payments to multiple loans, or how the payment was applied to a specific loan, for example, allocating the funds to interest rather than principle or fees.
For example, Navient may have allocated a payment intended to pay off a specific loan to all of the borrower’s loans, therefore prolonging the life of the loan that was supposed to be paid off.
The company only fixed these errors, according to the complaint, when customers discovered the problem and submitted complaints.
Repayment Plan Errors
The CFPB claims that for years, Navient steered struggling borrowers toward paying more than they were required to.
Under federal law, when a borrower has trouble repaying their federal student loans, they are eligible to apply for repayment plans that allow for a lower monthly payment.
Instead of making borrowers aware of this right, the complaint alleges that Navient steered borrowers into forbearance, an option designed to let borrowers take a short break from making payments, while interest continues to accrue.
From January 2010 to March 2015, Navient allegedly 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 provided borrowers with correct information on repayment plans.
Prevented Lower Payments
For those student loan borrowers who were able to enroll in an income-driven repayment plan, the CFPB says Navient’s inadequate notifications made it difficult to stay in the plans.
Borrowers enrolled in repayment plans are required to verify their income and family size annually in order to continue participation in the program.
However, the CFPB claims that Navient made it difficult by failing to adequately inform borrowers of deadlines or the consequences if they failed to act.
In some cases, Navient allegedly also obscured its renewal notices in emails sent to borrowers that did not properly alert them about the need to renew their repayment plan.
As a result, many borrowers did not renew their enrollment on time and lost their affordable monthly payments, often causing them to end up with payments that were hundreds, or even thousands, of dollars higher than they would have paid while enrolled in the plan.
Additionally, when borrowers are ousted from the plans, accrued interest is added to the borrower’s principal balance.
Co-Signer Release Requirements
As we know, the practice of employing a co-signer can often lead to lower interest rates on student loans, because the co-signer is on the hook to pay the loan if the borrower can not.
After several years, a student loan borrower may no longer need the co-signer to be listed on the debt. Many loan companies will allow these extra borrowers to be removed if certain requirements are met.
However, the CFPB found in a 2015 report that 90% of consumers who have applied for a co-signer release from their student loan lender were rejected because of unfair industry practices.
Those practices were apparently at work at Navient. According to the complaint, since Jan. 2014, Navient has required borrowers to make 12 consecutive, on-time principal and interest payments before applying for a co-signer release. However, the company did not specifically define what it meant by consecutive or on-time payments.
While Navient permits borrowers to prepay monthly installments in advance and tells customers who do prepay that they can skip upcoming payments, when borrowers did that, the company would reset the counter on consecutive payments made.
As a result, borrowers who tried to get ahead of their loans and prepay would have been denied co-signer release and had to start over.
Providing Incorrect Information to Credit Reporting Agencies
Navient, like other servicers, is required to provide information on borrowers’ repayment practices to credit reporting agencies.
The CFPB alleges that Navient failed in these duties by misreporting that borrowers who had their loans discharged through the federal Total and Permanent Disability discharge had defaulted.
Under federal law, severely and permanently disabled borrowers with federal student loans have a right to seek loan forgiveness under the program.
From Oct. 2012 to June 2014, Navient used incorrect reporting codes when reporting these discharged debts to CRAs.
As a result of this alleged practices, Navient harmed the credit scores and reports for thousands of borrowers.
In another issue, the CFPB claims that Navient—through its subsidiary Pioneer—made illegal misrepresentations to borrowers related to the federal loan rehabilitation program available to defaulted borrowers.
The company allegedly told borrowers that completing the loan rehabilitation program meant that all adverse information would be removed from their credit reports. However, this was not accurate.
“For too long, students and families have been pushed deeper in debt because loan servicers like Navient have given them the runaround at every stage of repayment,” says our colleague Suzanne Martindale, staff attorney for Consumer Union. “The CFPB’s investigation reveals how devastating these servicing failures can be to borrowers. The agency should be lauded for taking action to hold Navient accountable for their egregious practices and working to ensure borrowers are treated fairly and get the relief they deserve.”
In addition to the CFPB’s complaint filed on Wednesday, the attorneys general for both Illinois and Washington state filed a lawsuit against Sallie Mae, Navient, and its subsidiaries related to similar questionable practices.
Both AGs allege—after a four-year multi-state investigation—that Sallie Mae and Navient engaged in widespread unfair and deceptive subprime lending, failed to offer proper repayment options, and engaged in deceptive collection practices.
According to the lawsuit, for decades Sallie Mae—and more recently Navient—have originated risky and expensive private student loans that were “designed to fail.”
These loans, the complaint alleges, carried high interest rates and fees and were often made to students attending poorly accredited for-profit schools.
Sallie Mae increased its unfair and deceptive subprime lending while disregarding evidence that these loans would likely default at extraordinarily high rates, the suit alleges.
“My investigation found Sallie Mae put student borrowers into expensive subprime loans that it knew were going to fail,” Illinois AG Lisa Madigan said during a press conference on the lawsuit. “Navient’s actions have led to student borrowers needlessly carrying billions of dollars in debt and the company must be held accountable.”
The Illinois AG’s office reiterated the CFPB’s allegations, claiming that Navient engaged in deceptive servicing of student loans.
The suit alleges that Navient failed to provide correct information on repayment plans, pushed borrowers into forebearance, and improperly allocated payments as borrowers asked.
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