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Navient Faces Enforcement Action From U.S. Regulator

Updated on
  • Regulator’s suit targets company spun off from Sallie Mae
  • Navient says lawsuit unfounded and politically motivated

Navient Corp., the largest servicer of student loans in the U.S., was sued by a U.S. regulator over allegations that the company “systematically” cheated borrowers.

Navient, formerly part of Sallie Mae, failed to properly service private and federal loans, provided incorrect information to borrowers, improperly processed payments and didn’t respond to complaints, the Consumer Financial Protection Bureau said in a statement Wednesday announcing the lawsuit.

“For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans,” CFPB Director Richard Cordray said in the statement.

Navient said in a statement that the allegations are “unfounded” and that it rejected an ultimatum from the consumer agency to settle before the presidential inauguration of Donald Trump. Navient said the suit’s timing “reflects their political motivations.”

Targeting Cordray

As Trump prepares to step into the White House, Cordray could be a target for replacement. He’s among several regulators put in place by President Barack Obama who are planning to stay on the job, but a recent federal court ruling left an opening for the incoming president to try to dismiss him.

If the Navient lawsuit had been held beyond Friday’s inauguration, the agency’s ability to file it may have been less certain.

Navient, based in Wilmington, Delaware, disclosed in a November filing with the Securities and Exchange Commission that it had received notice of the probe from the CFPB almost three years ago. The company said in its disclosure that the regulator was considering fining the company, demanding customer restitution and calling for changes in business practices.

“We believe that Navient repeatedly creates obstacles to repayment by misallocating or misapplying payments,” Cordray told reporters Wednesday. “The company all too often fails to correct its errors unless a consumer stays vigilant, discovers the problem, and contacts the company to insist that it be fixed.”

Managing Accounts

Loan servicers are the conduit between student borrowers and lenders, helping to navigate aspects of repayment that can be confusing to borrowers.

As with mortgage servicers, they manage borrowers’ accounts, process monthly payments and communicate with borrowers about repayment. When struggling borrowers seek to make alternative payment plans for their federal loans, they contact the servicer.

The lawsuit calls for Navient, which services more than 12 million borrowers, to stop any “illegal conduct” and pay back harmed customers. But Navient contends that the CFPB is trying to retroactively impose new servicing standards on the company’s previous actions.

“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,” the company said. 

Multistate Investigation

Illinois Attorney General Lisa Madigan, who led a multistate investigation into Navient, said Wednesday that her office has also sued Navient and its subsidiaries for “widespread abuses across all aspects of its business,” including putting customers in subprime loans the company knew were going to fail. The suit calls for restitution, the return of unlawful profits, civil penalties and canceling or revising agreements with Illinois consumers.

Navient handles a portfolio of about $300 billion in student loans and acts as a servicer for the Department of Education. In 2014, the company created a $60 million fund to compensate borrowers after the Department of Justice accused it of violating the rights of military members by failing to give them an interest-rate cap they were due.

‘Incredibly Complicated’

Sallie Mae announced in 2013 it was splitting into two companies, with Navient taking the loan-servicing portion of the public company.

Sallie Mae still makes private student loans, which are a small portion of the overall $1.4 trillion market, dominated by government-originated and -backed loans. In 2010, the Obama administration cut private lenders out of the business of making new loans.

The lawsuit is important for ensuring that student loan borrowers are given every opportunity to succeed in repaying loans, Persis Yu, director of National Consumer Law Center’s Student Loan Borrower Assistance Project, said in a statement.

“The student loan system is incredibly complicated and hard to navigate,” she said. “The action by the CFPB against Navient demonstrates the importance of having a strong and independent consumer watchdog on the side of students and working families.”