“Make hay while the sun is shining.” The Consumer Financial Protection Bureau (the “CFPB”) is making its proverbial hay, after facing political attacks and constitutional challenges to its very structure, by bringing suit against Navient and two of its subsidiaries for an array of alleged failures in servicing of student loans.
In the Complaint, the CFPB states that Navient has failed to correctly allocate payments received to the customer’s account, particularly where that customer has multiple loans. The Bureau further alleges that representatives of Navient, rather than offering the student income-based repayment plan, often directed their customers to enter into forbearance periods, during which the interest capitalized, causing an increase in the principal balance of those loans. For those who did receive income-based payment plans, it is alleged that Navient failed to send appropriate notices detailing requirements and requests for information for borrowers to maintain the income-based payment plan, causing the monthly payment to increase by hundreds, if not thousands of dollars, and potentially disqualifying those borrowers from student loan forgiveness eligibility.
Navient is also alleged to have misreported the discharge of U.S. Armed Forces Service members’ loans by reporting that the military borrowers had been in default at the time of discharge when they had not been in default.
According to the Bureau, these, and other errors in servicing, put borrowers at a severe disadvantage in repaying their loans and maintaining good credit. “For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans,” advised CFPB Director Richard Cordray. Director Cordray further stated that, over the course of servicing its loans, Navient “chose to shortcut and deeive 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.”
This action has the potential to give a lasting impact on student loan servicing, as Navient is the nation’s largest student loan servicer, currently servicing more than $300 billion in both federal and private student loans. In a study conducted in 2016 by the CFPB, it was found that more than 8 million student loan borrowers are in default on at least one of their loans. Student loan servicers are reminded that the 2012 Mortgage Servicing Settlement, involving similar allegations with respect to errors in servicing against the 5 largest home loan servicers, paved the way for CFPB regulations that now impact nearly all home loan servicers.
BSCR will continue to monitor this action and will provide important updates as the case progresses.
The idea of an electronically executed mortgage is far from new; in fact, e-mortgages were being recorded as early as the year 2000. Yet, a number of issues with electronic loan documents have, ever since, hindered their more widespread implementation.
The Electronic Signatures in Global and National Commerce Act (“ESIGN”), enacted in 2000, states that a contract may not be denied legal effect solely on the basis that it is in electronic form. Similarly, the Uniform Electronic Transactions Act (“UETA”), adopted by 47 states, provides that a signature may not be denied enforceability merely because it is electronic. Home loan transactions, however, necessitate another consideration: electronic notarization.
Virginia, in 2012, was the first state to enact legislation permitting remote e-notarization through the use of webcam technology. In 2015, Montana passed a law permitted remote e-notarization in transactions where the signor is a legal Montana resident and the real property that is the subject of the transaction is located in Montana. To date, while another 19 states permit some form of e-notarization, only Virginia and Montana allow a mortgage to be executed electronically and notarized remotely by webcam.
Arguably, under the Full Faith and Credit Clause, since Virginia’s e-notary law does not impose a limitation with respect to the residency of the signor or the location of the real estate, a Virginia notary could witness the signature at a loan closing in another state and still have that recognized as a valid and enforceable contract. Even so, with the high degree of caution required for all aspects of loan origination, lenders and investors may determine that the risk involved with the transaction far outweighs any convenience or cost-cutting realized from remote closings.
Remote e-notarization would bring loan document execution up to speed with the convenience of shopping for mortgages in the comfort of one’s own home, but experts have debated the pros and cons of allowing these transactions to proceed with no face-to-face interaction. For instance, the risk of identity theft is a concern to some. However, remote e-notaries may use systems with knowledge-based authentication, or scan the signor’s license, in order to ensure there isn’t a forgery.
Another cause for concern is the potential for claims that loan documents were signed under duress, and were therefore invalid. Certainly, it would be difficult to prove whether or not there was duress when only a limited space is captured on webcam footage during the remote closing. Even so, the same type of hypothetical where a gun is pointed at the signor could occur in a face-to-face notarization. Because neither a traditional closing nor an electronic closing could prevent such scenarios from happening altogether, advocates of e-notarization argue that we should modernize our practices to conform to the technology we now have.
It may be that the most substantial inhibitor to mass implementation of e-mortgages is, simply put, fear of the unknown.
About Financial Services Law Blog
The BSCR Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry. This blog will inform readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph, and our Financial Services practice.
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