Navient Corp., the largest servicer of student loans in the US, has become the subject of investigation by financial regulators and prosecutors stretching from Massachusetts to the state of Washington. Suspected of wrongdoing by various government regulators, Navient is finding the going increasingly difficult. This is especially so because each of the probes is having a considerable effect on the bottom line of the company.
Student Loan Behemoth Under Fire from Various Governmental Agencies
In his article, Shahien Nasiripour writes that the Consumer Financial Protection Bureau (CFPB) is leading multiple probes into Navient’s debt collection and loan servicing practices. The CFPB is the principal federal agency responsible for protecting borrowers from unscrupulous lenders. In addition, the US Department of Education is investing the student loan behemoth over allegations made by the Department of Justice. The Department of Justice alleges that Navient intentionally cheated active-duty troops on their federal student loans.
As if this were not enough, the company is also facing several investigations from a number of states including Illinois and Washington. Several states have joined hands for sharing information and discussing the progress of their investigations. The most recent of these meetings between state prosecutors and federal regulators took place in mid-February in Chicago.
In another development, the authorities in Massachusetts have commenced a probe on Pioneer Credit Recovery – a debt collection subsidiary of Navient. The probe deals with allegations that the company mistreated distressed borrowers.
Furthermore, Benjamin Lawsky, the superintendent of financial services in the state of New York, also launched an investigation into allegations that the company engaged in fraud or other misconduct in late 2014. It is worth noting that Lawsky is responsible for extracting billions of dollars from settlements with lawbreaking banks.
Navient’s Collection Activities During Hynes’s Stint Chief Cause of Concern
Federal authorities have criticized the collection activities followed at Navient during the tenure of Timothy Hynes – Navient’s chief risk and compliance officer. The missteps taken by Hynes are central to the recent spate of investigations into the company, according to various federal authorities.
Hynes took over the post of chief risk and compliance officers at Navient in April 2014. Navient spun off from SLM Corp., the company that people popularly referred to as Sallie Mae, at the same time. Hynes had previously been overseeing the student loan collections business at Sallie Mae.
Navient Leads in Complaints Concerning Private Student Loans
The US Department of Education maintains a log of all complaints on federal and private student loans. It does not disclose details of complaints on federal student loans to the public. However, the federal consumer bureau catalogs all complaints on lenders of private student loans. This includes details on those debt collectors who try to recover money on private or federal student loans in default.
It is worth noting that the agency does not verify the merits of all the complaints. It simply forwards them to the companies. Thereafter, the companies are responsible for responding to the consumers and updating the consumer bureau.
On examining the complaint data, Nasiripour found that in terms of complaints on private student loans, Navient is the worst performer in the industry. About 46 percent of the approximately 11,400 complaints in the consumer bureau’s database pertain to Navient or its predecessor i.e. Sallie Mae.
Similarly, Navient and its predecessor company are responsible for about 20 percent of the 2,600 complaints lodged against debt collectors trying to recover money on defaulted private or federal student loans. In addition, Navient and its predecessor company are also responsible for issuing refunds to the consumer following complaints in 55 percent of the 31 such complaints.
It is worth mentioning that loan-servicing companies resolve a vast majority of complaints without refunding any money to the consumer. For instance, these companies dealt with 70 percent of all complaints received by the consumer bureau by detailing the steps the company would take for responding to the complaint. Given this backdrop, it could surprise many to know that Navient and its predecessor company are responsible for 80 percent of all complaints that ended with the issuance of a refund to the consumer.
Navient Overcharged Active-Duty Troops for Nearly a Decade on their Student Loans
Earlier this year, The American Legion, one of the oldest and most politically powerful veterans groups in the country, criticized the manner in which the Education Department was handling federal allegations that Navient cheated active-duty troops on their federal student loans intentionally.
The Legion informed the House Veterans’ Affairs Committee that the Education Department appeared to be dragging out a review of whether Navient had violated the Servicemembers Civil Relief Act. In May 2014, Navient had settled federal accusations by agreeing to pay $60 million to troops in accordance with its settlement with the Federal Deposit Insurance Corp. and the Department of Justice. However, it is worth noting that Navient did not accept or deny wrongdoing on its part.
Despite the settlement, Education Secretary Arne Duncan ordered an additional probe into the matter. Department officials expected the review to take 120 days at the time. However, an initial review in the fall resulted in clearing the company of wrongdoing. As a result, the Department of Education hired Ernst & Young to carry out an additional probe to ascertain Navient’s compliance with the servicemembers law.
If the Education Department concludes that the company breached its contract by overcharging active-duty troops in violation of the law, Navient could stand to lose approximately $130 million in annual revenues.
Navient Corp. – Facing An Uncertain Future?
According to federal data, more than 40 million Americans collectively owe more than $1.2 trillion on their student loans. Navient processes monthly payments for approximately one-quarter of the market. In other words, the company probably services more than 12 million borrowers who collectively owe around $300 billion in student loans.
Nasiripour writes that this series of investigations into allegations of misconduct by Navient has come at a time when the entire student loan industry is coming under increasing levels of scrutiny for following various anti-consumer practices. The truth into these allegations will only emerge once the investigation concludes. If found guilty at that time, Navient will need to face the penalties imposed by the authorities.
However, for the moment, the probes are still having a considerable impact on the fortunes of the company. According to Jack Remondi, the company’s chief executive, the company expects operating expenses to be less than $900 million this year, after deducting all government-ordered refunds to aggrieved borrowers. This amount would exceed the company’s expenses in each of the last three years, according to analysts at Compass Point Research & Trading.
In February, the US Department of Education had announced that it would cease sending new accounts to Navient under its existing debt collection contract. This resulted in the downgrading of Navient’s stock by British bank Barclays because the bank felt that the potential rewards were no longer worth the risk. In addition, the announcement resulted in sending the cost of insuring against a Navient default soaring by 19 percent.
Clearly, the announcement by the Education Department will end up limiting the growth of Navient. By losing lucrative government business, traders in the company believe that Navient could well end up defaulting on its obligations. On its part, Navient has hired former members of Congress to lobby on its behalf. Some prominent members include Vin Weber, a Republican from Minnesota, and Denny Rehberg, a Republican from Montana.
Remondi mentions that the Educations Department rewarded Navient with a new contract for collecting payments on federal student loans in 2014, despite the regulatory headaches that Navient faced. He also said that Navient remains in the reckoning for the new debt collection contract from the Education Department. However, if the investigating agencies find any merits in the allegations against Navient, this scenario could well change very quickly.