Battle Over Student Loans: The Consumer Watchdog Bureau is Flexing Its Muscle Against the Nation’s Largest Student Loan Company While It Still Can

Battle Over Student Loans: The Consumer Watchdog Bureau is Flexing Its Muscle Against the Nation’s Largest Student Loan Company While It Still Can

By: Gemini A. Nazareno, Jr.


On January 18, 2017, the Consumer Financial Protection Bureau (“CFPB”) sued Sallie Mae spin-off[1] Navient Corporation (“Navient”), the largest servicer of both federal and private student loans in the United States, for systematically and illegally failing borrowers at every stage of repayment.[2] According to the CFPB, Navient cheated borrowers of the opportunity to exercise their important right to lower payments based on what they could afford[3] by giving them bad information, processing payments incorrectly, and failing to act on complaints.[4] As a whole, the CFPB alleges Navient’s illegal practices made it more difficult and costlier for borrowers to repay their student loans.[5]


Navient, based in Wilmington, Delaware, manages and collects payments on more than $300 billion in federal and private-market student loans.[6] It services loans held by more than 12 million borrowers, including over 6 million accounts under its contract with the United States Department of Education (“Department of Education”).[7] Although Navient does not make the loans, it holds lucrative contracts to collect payments each month on behalf of banks, the government, and other lenders.[8]


In addition to Navient, the CFPB also named two of the company’s subsidiaries in the lawsuit: Navient Solutions, which is responsible for loan servicing operations, and Pioneer Credit Recovery, which specializes in the collection of defaulted student loans.[9] The CFPB is seeking restitution for affected borrowers and monetary penalties.[10]


In its high-profile action, the CFPB brought charges against Navient including: (1) failure to correctly apply or allocate borrower payments across multiple loan accounts, (2) steering troubled borrowers into forbearance, an option designed to let borrowers take a short break from making payments, but also allows interest charges to accumulate, (3) providing obscured information to borrowers necessary for them to maintain lower repayment plans, (4) deceiving private student loan borrowers about requirements to release co-signers from their loans, and (5) harming the credit of disabled borrowers, including severely injured veterans, by misreporting their loan discharges and subsequently blocking them from exercising their right to seek loan forgiveness.[11]


Navient intends to vigorously defend against the CFPB’s allegations, calling the lawsuit a politically-motivated midnight action in the wake of President Donald J. Trump’s inauguration.[12] Navient slammed the CFPB’s actions, saying it “will not accept agenda-driven ultimatums designed to get headlines rather than help for student borrowers.”[13] According to Republican opposition of the CFPB, the Bureau is flexing its muscle while it still can.[14]


The CFPB, which was created by the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd–Frank”) as a financial oversight mechanism following the 2008 recession,[15] has garnered varying sentiments among America’s conservatives[16] due to its excessive regulation of consumer finance operations and lack of accountability.[17] Critics of the CFPB want to free lenders from the Bureau’s excessive regulation and costs to operate, which end up being passed down to consumers.[18] In addition, critics want to hold the CFPB more accountable for its actions by changing its funding stream so its budget is approved by Congress, rather than the Federal Reserve, and replacing its single director with a five-member commission.[19] While many Republicans simply oppose the CFPB,[20] some Republican lawmakers want President Trump to fire the CFPB’s director, Richard Cordray, now that he has assumed his seat in the Oval Office.[21] A few conservatives have even gone as far as expressing eagerness to constrain or even dismantle the CFPB now that the Trump Administration has settled into its place in the West Wing.[22]


Considering that the consumer watchdog bureau has been entangled in partisan politics[23] since its formation and has been perceived as one of the most controversial components of Dodd–Frank,[24] it does not come as a surprise that the CFPB faces potential restrictions to its power now that President Barack H. Obama has left the White House.[25] On October 11, 2016, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) ruled in PHH Corporation v. CFPB[26] that the independent CFPB’s structure was unconstitutional because it improperly gave too much power to a single director.[27] The D.C. Circuit further held that the CFPB’s organization violated the United States Constitution’s separation of powers because it limited the president’s ability to remove the director.[28] But, the federal appeals court offered a fairly simple solution: give the president the power to fire the director at will.[29] Now, the president will have the power to remove the director at will, but also supervise and direct the director.[30] Under the new framework, President Trump has the ability to install a new CFPB director to undo his or her predecessor’s policies.[31]


According to Navient, the CFPB’s lawsuit improperly seeks to impose penalties based on new loan servicing standards applied retroactively and only against one servicer.[32] Navient argues that the standards being applied do not track with the Department of Education’s regulations, that they will harm student loan borrowers, and increase defaults among borrowers.[33] Navient claims borrowers with federal loans that it services are 30% less likely to default than their peers with loans serviced by other companies.[34] Navient’s claims, however, seem a little hard to believe considering that in May 2015, the United States Department of Justice announced that almost 78,000 members of the United States military would be reimbursed under a $60 million consent decree because they had been charged excess interest on their student loans by the company.[35]


Since it began operations in July 2011, the CFPB asserted that thousands of borrowers had filed complaints with Navient, the Bureau itself, and other government agencies and departments about the obstacles borrowers faced in repaying federal and private student loans serviced by the company.[36] Many complained Navient allegedly mishandled loan payments, buried critical information in fine print, and set obstacles for borrowers trying to release co-signers from their loans.[37] Among its other failings, the CFPB accused Navient of deliberately steering borrowers away from income-based repayment plans that could have lowered their loan costs in order to maximize its own profits.[38] In a statement by Cordray, “Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans[.] At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs.”[39]


Aside from the CFPB’s action, Illinois and Washington State have filed their own lawsuits against Navient, lodging accusations of unfair and deceptive practices.[40] Navient is disputing these state actions as well.[41]


Overall, student loan debt continues to put financial and political pressure on many borrowers and politicians, respectively, regardless of political affiliation.[42] Student debt evolved into a leading issue during the United States presidential election of 2016 as many students complained that student loans had diminished their career prospects.[43] Regulators and consumer groups across all levels of government have been scrutinizing Navient and other major servicers part of the $1.2 trillion student loan industry.[44] Given the impact student loan debt has on the financial stability of many Americans, especially young adults and the working class, state participation in the lawsuits against Navient could ensure the case moves forward even if the CFPB’s role is reduced or eliminated by the GOP-led administration.[45] Despite the lawsuit, Navient still holds a contract with the Department of Education to service federal student loans through 2019.[46]

[1] Ashlee Kieler, Student Loan Giant Navient Sued by CFPB and Two States Over Alleged Illegal Practices, Consumerist (Jan. 18, 2017, 2:49PM), https://consumerist.com/2017/01/18/student-loan-giant-navient-sued-by-cfpb-two-states-over-alleged-illegal-practices/.

[2] Marcy Gordon, Feds Sue the Biggest Student Loan Company in the U.S. Alleging ‘Shortcuts and Deception’ Against Borrowers, Bus. Insider (Jan. 18, 2017, 4:55PM), http://www.businessinsider.com/cfpb-sues-student-loan-company-navient-2017-1.

[3] Id.

[4] Id.

[5] Gordon, supra note 2.

[6] Id.

[7] Id.

[8] Stacy Cowley & Jessica Silver-Greenberg, Student Loan Collector Cheated Millions, Lawsuits Say, N.Y. Times (Jan. 18, 2017), https://www.nytimes.com/2017/01/18/business/dealbook/student-loans-navient-lawsuit.html.

[9] Kieler, supra note 1.

[10] Gordon, supra note 2.

[11] CFPB Sues Nation’s Largest Student Loan Company Navient for Failing Borrowers at Every Stage of Repayment, CFPB (Jan. 18, 2017), http://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/.

[12] Gordon, supra note 2.

[13] Peter Schroeder, Consumer Bureau Sues Nation’s Biggest Student Loan Company, Hill (Jan. 18, 2017, 1:52PM), http://thehill.com/policy/finance/314857-consumer-bureau-sues-nations-biggest-student-loan-company.

[14] Maggie McGrath, CFPB Sues Student Loan Servicer Navient for Failing Borrowers at Every Stage, Forbes (Jan. 18, 2017, 2:58PM), http://www.forbes.com/sites/maggiemcgrath/2017/01/18/cfpb-sues-student-loan-servicer-navient-for-failing-borrowers-at-every-stage/#20f3f696477d.

[15] Martha C. White, Student Loan Collector Navient Sued for Overcharging Borrowers, NBC News (Jan. 19, 2017, 3:43PM), http://www.nbcnews.com/business/business-news/student-loan-collector-navient-sued-overcharging-borrowers-n709111.

[16] Id.

[17] Marielle Segarra, How GOP Will Target Consumer Financial Protection Bureau, Marketplace (Nov. 21, 2016, 5:59AM), http://www.marketplace.org/2016/11/21/elections/gop-congress-will-target-cfpb.

[18] Id.

[19] Id.

[20] Id.

[21] Gordon, supra note 2.

[22] McGrath, supra note 14.

[23] Gordon, supra note 2.

[24] Norbert Michel, The CFPB is in the Crosshairs, Exactly Where It Belongs, Forbes (Jan. 24, 2017, 6:29AM), http://www.forbes.com/sites/norbertmichel/2017/01/24/the-cfpb-is-in-the-crosshairs-exactly-where-it-belongs/#5b5c32454b2a.

[25] McGrath, supra note 14.

[26] 839 F.3d 1 (D.C. Cir. 2016).

[27] Stacy Cowley, Court Gives President More Power Over Consumer Agency Chief, N.Y. Times (Oct. 11, 2016), https://www.nytimes.com/2016/10/12/business/dealbook/consumer-financial-protection-bureau-court-ruling-unconstitutional.html.

[28] Gordon, supra note 2.

[29] Cowley, supra note 27.

[30] Id.

[31] Michel, supra note 24.

[32] Gordon, supra note 2.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Cowley & Silver-Greenberg, supra note 8.

[38] Id.

[39] Gordon, supra note 2.

[40] Cowley & Silver-Greenberg, supra note 8.

[41] Id.

[42] Andrew Josuweit, Here’s What Student Loan Borrowers Expect Now that Trump is President, N.Y. Times (Jan. 24, 2017, 6:00AM), http://www.forbes.com/sites/andrewjosuweit/2017/01/24/heres-what-student-loan-borrowers-expect-now-that-trump-is-president/#4d9361a264e0.

[43] Cowley & Silver-Greenberg, supra note 8.

[44] Id.

[45] White, supra note 15.

[46] Cowley & Silver-Greenberg, supra note 8.