CFPB Sets its Sights on Student Loan Servicing

ABSTRACT: The CFPB recently filed its complaint against Navient, the nation's largest servicer of federal and private student loans for alleged failures in servicing those loans. Filed in the United States District Court for the Middle District of Pennsylvania, the Complaint contains allegations that Navient violated the Consumer Financial Protection Act, the Fair Credit Reporting Act, and the FDPCA and seeks millions in restitution.

“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.

Baker Sterchi will continue to monitor this action and will provide important updates as the case progresses.