Loans and handsThe CFPB announced on Wednesday that it had filed a lawsuit against Navient Corporation, formerly part of Sallie Mae, and two of its subsidiaries for alleged “systematic” failures in student loan servicing. The complaint alleges claims under the Consumer Financial Protection Act of 2010, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act. The States of Washington and Illinois also announced lawsuits of their own, asserting parallel state law claims. The lawsuits followed a lengthy internal investigation at Navient that culminated in predictions that the company would be facing litigation from federal regulators. Nonetheless, they represent a significant and groundbreaking step in the world of student lending regulation and enforcement.

Navient is the largest servicer of student loans in the United States, servicing approximately 12 million federal and private student loans totaling more than $300 million. Navient Corporation operates through its operations subsidiary Navient Solutions, Inc. and its collection subsidiary Pioneer Credit Recovery, Inc. Both subsidiaries have a history with the CFPB. In November 2014, the CFPB served Pioneer Credit Recovery, Inc. with a Civil Investigative Demand (“CID”). Navient Solutions, Inc. received a “Notice and Opportunity to Respond and Advise” (“NORA”) from the CFPB in August 2015, indicating the agency’s intent to investigate the company’s practices related to disclosures and assessments of late fees. Soon after, Navient Solutions disclosed that it had received the NORA and indicated that could not “provide any assurance that the CFPB will not ultimately take legal action against NSI or that the outcome of any such action, if brought, will not have a material adverse effect on the Company.” Navient Corporation Form 8-K (Aug. 19, 2015).

Navient’s statement proved to be prescient. On January 18, the CFPB filed its complaint in the United States District Court for the Middle District of Pennsylvania, where it has been assigned to Judge Robert D. Mariani, a 2011 Obama appointee. On the same day, the Attorney General for the State of Washington brought claims in the King County Superior Court (Washington), and Illinois’s Attorney General filed a complaint against Navient Corporation, Navient Solutions, Inc., Pioneer Credit Recovery Inc., General Revenue Corporation, and Sallie Mae Bank in Cook County Circuit Court (Illinois). The complaints allege that Navient failed to properly apply loan payments, caused borrowers to face greater interest charges than necessary by steering borrowers into forbearance rather than alternative payment plans, obscured information necessary for borrowers to remain in alternative payment plans, denied co-signer releases based on deceptive practices related to consecutive payments and prepayments, and misreported information to credit reporting companies for borrowers whose loans were forgiven under a federal program for severely and permanently disabled borrowers.

Navient released a statement on Wednesday, calling the CFPB’s allegations unfounded and politically motivated. According to Navient’s statement, the CFPB gave the company an ultimatum to settle by inauguration day or face a lawsuit. The statement criticizes the CFPB for singling out Navient and seeking to retroactively apply new servicing standards that are inconsistent with Department of Education regulations. Navient also released a fact sheet defending its servicing practices and addressing some of the allegations in the complaints.

The CFPB’s decision to sue Navient resembles the regulatory and enforcement crackdown on mortgage servicers at the beginning of the foreclosure crisis. As early as 2011, States and the nascent CFPB began making public announcements regarding the (allegedly) sloppy foreclosure processes and bad loan modification processing procedures in place at many of the country’s largest banks and non-bank mortgage servicers. Those complaints eventually turned into the National Mortgage Settlement, under which the five largest mortgage servicers (and eventually several other smaller servicers) settled with the federal government and 49 States by promising to provide some $26 billion in relief for distressed homeowners and to abide by a review and oversight process overseen by an independent monitor.[1] The regulatory fallout from the foreclosure crisis continued in the form of several rounds of CFPB rulemaking, including the announcement of the final mortgage servicing rules in February 2013. Many in the industry would claim that the effects are still being felt in the form of CFPB targeted examinations and enforcement actions against mortgage servicers. Only time will tell whether yesterday’s lawsuit marks a new era of regulatory and enforcement actions against student loan servicers.

[1] Bradley Arant Boult Cummings LLP represented the ResCap Parties, Ocwen Financial Corporation and Ocwen Loan Servicing, LLC, HSBC Mortgage, Inc., and Suntrust Mortgage, Inc. in negotiating the National Mortgage Settlement.