Posted: March 29th, 2017
By: Jacky Brammer*| Staff Writer
Recent lawsuits filed by the Consumer Financial Protection Bureau and the Attorneys General of the states of Washington and Illinois allege that Navient, the nation’s largest servicer of student loans, used illegal and deceptive practices to trap students into higher repayment plans for longer periods of time than necessary. Navient denies any wrongdoing.
The most serious allegation is that, from January 2010 to March 2015, Navient based employee compensation in part on manipulating student borrowers into postponing payments through forbearance which cost students an extra $4 billion in unnecessary fees. In another example, Navient is accused of shouldering disabled veterans with poor credit reports due to improperly marking their loan discharges as defaults.
The lawsuit could have far-reaching implications as Navient provides services for private and federal loans worth more than $300 billion for over 12 million student borrowers. Put another way, Navient is responsible for more than 25% of college and higher education loans.
In its role as student loan account servicers, Navient earns billions of dollars with low overhead and low margins because many student borrowers repay loans automatically through their bank accounts. However, if a student is late on a loan payment, Navient charges exorbitant fees that are several times more expensive than standard servicing fees.
Given that student debt totals roughly $1.3 trillion, the pending student loan crisis, based partly on the deceptive and illegal practices allegedly conducted by Navient, is drawing parallels to the subprime mortgages of the 2008 financial crisis.
Critics question the timing of the lawsuit filing coming in the twilight of the Obama administration’s last days. During the campaign and transition into the Trump administration, many key Republicans and Trump supporters called for the firing of the Consumer Financial Protection Bureau’s director Richard Cordray.
However, even attempting to fire Cordray would likely set off a legal battle based on the wording of the Dodd-Frank Act. The 2010 law imposed regulations on banks and allowed for the creation of the Consumer Financial Protection Bureau. Further, the act allowed for the bureau’s director to be removed only for cause as defined as “inefficiency, neglect of duty or malfeasance.” Perhaps, it is no surprise that in recent days President Trump has called for a full review with an eye toward relaxing or repealing many of the regulations in the Dodd-Frank Wall Street Reform Act.
President Trump already has strong legal standing for his position given that the CFPB’s current structure was ruled unconstitutional last October by the U.S. Court of Appeals for the District of Columbia Circuit. The agency has appealed the ruling and the case will be heard en banc by the same court. The CFPB argues that the appellate court’s ruling interferes with Congress’s ability to create independent agencies similar to the CFPB that are under a single director and that the ruling could adversely affect pre-existing agencies like the Social Security Administration, Federal Housing Finance Agency, and the Office of Special Counsel.
Either way, Navient’s prospects likely remain optimistic under President Trump. The company’s stock went up 17% the day after the election and has remained strong even after news of the lawsuit.
Jacky Brammer is a second-year law student at Wake Forest University School of Law. He holds a Bachelor of Arts in American history and English from The University of North Carolina at Chapel Hill and a Master of Arts in English literature from The University of North Carolina Greensboro. Upon graduation, he intends to pursue a career in public interest law and criminal defense.