Navient Is Being Sued For Failing Borrowers At Every Stage of Repayment

Navient is the largest student loan servicer, formerly known as Sallie Mae, and they are now facing a lawsuit that alleges the company misleads borrowers to the tune of $4 billion.

Customers of Navient were allegedly hit with unnecessary interest payments, denied options to reduce their debt and suffered damage to their credit scores, according to the lawsuit from the Consumer Financial Protection Bureau filed on Wednesday.

This is one of the Bureau’s final actions before the GOP-led administration begins – one that wants to completely eliminate the loan servicer. The CFPB was put in place following the financial crisis who’s goal is to oversee all aspects of the financial services industry under one umbrella.

The CFPB is not only suing Navient but also the subsidiaries Navient Solutions and Pioneer Credit Recovery. In total, more than 12 million borrowers are under the servicer and about half of those are under contract with the U.S. Department of Education.

The CFPB states that Navient collected $4 billion in interest alone from pushing students into “forbearance,” where students payments are put on hold so their interest can continue to accrue – as opposed to enrolling them in income-based repayment programs for which they are eligible.

Disabled and Veterans Had Their Credit Scores Negatively Affected

The disabled borrowers and those that suffered financial hardship – including injured and disabled veterans – were reported in “default” rather than “discharged” status to credit bureaus which devastated their credit scores.

“This is a huge hit to say you’re in default on a federal loan versus having the entire loan forgiven. It’s a huge difference,” says Persis Yu, director of National Consumer Law Center’s Student Loan Borrower Assistance Project.

With these negative hits to their credit and a record of default, it’s nearly impossible for these disabled and veteran borrowers to take out mortgages or other loans, open credit cards, and even pass background checks.

On Wednesday, the Attorney General of Illinois and Washington also filed a suit against Navient, which claims deceptive and predatory practices in the company’s loan servicing and collection activities.

“My investigation found Sallie Mae put student borrowers into expensive subprime loans that it knew were going to fail,” Illinois Attorney General Lisa Madigan said in a statement. Her suit also included Sallie Mae Bank and General Revenue Corporation, a collection agency and another subsidiary of Navient.

Aggressive Tactics

Bob Ferguson, Washington state Attorney General, also cited the forbearance abuse discussed in the CFPB suit, along with what he called, “aggressive and misleading collection tactics,” during his suit announcement.

“It really is incredibly galling that this has gone on this way for so long,” said Suzanna Martindale, staff attorney at watchdog group the Consumer Union. “They weren’t even doing the most baseline competent servicing.”

Navient has denied all claims in their press releases that were issued on Wednesday. It stated the servicer intends to fight these charges in court. The company says the complaints are “midnight action filed on the eve of a new administration” and they blasted what they call “agenda-driven ultimatums.”

CFPB advocates say that the uncovering of this systematic failure is a sign the agency is nothing short of necessary.

“This is proof positive that the CFPB is doing exactly what it’s supposed to be doing,” Martindale said. “This would be such a kick in the teeth to regular working families to do something like dismantle it, disable it, or defund it.”

However, victimized borrowers may be waiting a very long time for recompense. “Litigation can often be long and cumbersome,” said Rohit Chopra, the senior fellow at the Consumer Federation of America, who is also the former assistant director and student loan ombudsman at the CFPB. “It’s hard to say when borrowers will start seeing debt relief.”

The Details

According to the allegations, Navient charges a late fee of 5% for each missed payment on private student loans. The lawsuit states that the late payments are unlawful because they do not bear a relationship to the actual costs incurred by Navient in processing the missed payments. Under California’s consumer protection laws, the late fee must be based on Sallie Mae’s actual cost associated with a late payment.

Additionally, the CFPB states that the 5% interest rate is exorbitant because it is equivalent to an annual interest rate of a staggering 120%. In addition to the late fee, Navient continues to charge regular interest on the missed payment amount, which causes the borrower to pay Navient twice for being late on one single loan payment.

The private student loans are the loans that are being affected by this. They are marketed by Navient as Signature Loans, Signature Student Loans, and Signature Select Loans, and do not include Federal Family Education Loans which are issued by the government itself and not the servicer. The private loans often originate by a bank, lending agency or financial services firm, but is serviced by Navient.

Failing Borrowers at Every Stage of Repayment

For years, Navient created obstacles to repayment by providing bad information, processing payments incorrectly and failing to act when borrowers complained. The company also allegedly cheated many struggling borrowers, through shortcuts and deception, out of their rights to lower payments, which caused them to pay much more that they had to for their loans.

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

Formerly part of Sallie Mae, Inc., Navient is the largest student loan servicer in the United States. Servicers play a crucial role in the link between lenders and borrowers as they manage the borrower’s account, process their payments on a monthly basis and are the borrower’s main point of contact for help and payment on their loans.

The servicer is also put in place to assist borrowers facing financial hardships or unemployment to find and enroll them in alternative repayment plans or request modification of loan terms. A servicer is often different from a lender and borrowers typically have no say in which company is assigned to service their loans.

In 2009, income-drive repayment plans began offering students a way to pay on their loans monthly based on how much income they were earning. These plans were put in place as an affordable option for repayment. Under these programs, some borrowers meet the criteria for zero dollar monthly payments due to their income and family size.

An additional benefit of the income-drive repayment plans is that for the first three years after enrollment, many consumers are entitled to have the federal government pay part of the interest charges if they can’t keep up. Those enrolled in these programs are eligible for complete loan forgiveness after 20 or 25 years of monthly payments.

The CFPB states that Navient failed to provide even the most basic functions, that are necessary for adequate student loan servicing, at every stage of repayment for both federal and private student loans. Not only do they accuse Navient of providing bad and false information in writing and over the phone, but they also processed payments incorrectly, failed to act when borrowers complained and intentionally mislead their customers. These illegal practices made it much more difficult and costly for certain borrowers to pay off and pay down their loans. Among other allegations, the Bureau charges that Navient:

* Fails to correctly apply or allocate borrower payments to their accounts: Navient repeatedly misapplies or misallocates payments, often making the same error over multiple months. The company then fails to correct any of its errors unless a consumer discovers the programs and contacts the company. Even then the servicer often does not correct the problem.

* Steers borrowers, struggling to pay on their loans, to pay more than they have to: 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. However, the Bureau believes that Navient steers many borrowers into forbearance, an option designed to let borrowers take a short break from making payments. Yet, interest continues to run up during forbearance making the debt amount even higher for the borrowers to pay back. 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. A great deal of these charges could have been avoided, states the Bureau, had Navient followed the law.

* Obscured information consumers needed to maintain lower payments: Every borrower that enrolls in an income-based repayment program is required to rectify their income and family size annually to stay in their respective program. However, the Bureau states that the emails Navient sent to these borrowers failed to adequately inform them of critical deadlines or consequences if they failed to act. Navient also obscured its renewal notices so that their emails did not properly alert borrowers of the need to renew. Since borrowers were not correctly informed, many of them did not renew and lose their affordable monthly payments which were necessary for them to stay current on their loans. When this happened, the interest accrued and borrowers lost their protection, including interest subsidies and progress toward loan forgiveness.

The Bureau also alleges that Navient, through their subsidiary Pioneer, made illegal misrepresentations relating to the federal loan rehabilitation program for defaulted borrowers. The rehab program assists borrowers to get out of default status and avoid getting their taxes and/or wages garnished by the government.

The lawsuit state that Navient violated the Dodd-Frank Wall Street Reform, Consumer Protection Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. The suit aims for redress for the consumers harmed by Navient’s illegal practices.

To properly be placed in an income-based repayment program to assist with your federal student loan payments, or for more information, give us a call today at 800.940.8911.

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