Two years ago the Consumer Financial Protection Bureau sued the student-loan-servicing company Navient, alleging the business had steered borrowers toward suboptimal repayment options. The litigation has been grinding on ever since, but new documents suggest the CFPB never had a case to begin with. The legal action is looking more and more like the kind of politically driven nuisance lawsuit that many warned would be CFPB’s hallmark.
The CFPB claims that Navient — which holds a Department of Education contract to manage some of the $1.4 trillion in outstanding government-issued student loans — steered delinquent borrowers and those seeking lower payments into a forbearance, a loan status where payments temporarily drop to zero but interest still accrues. Under the government’s rules, borrowers are entitled to a forbearance after simply making a phone call to Navient, and there are no eligibility criteria to verify. CFPB alleges that Navient put borrowers into forbearance to save on administrative expenses but should have put those borrowers into the income-based-repayment program instead.
Under income-based repayment, borrowers might qualify for a lower payment but must first submit paperwork documenting their income and family size. A borrower’s income must be low relative to her debt to see a big payment reduction, while borrowers with small balances might not see any reduction (unless their incomes are near poverty, in which case payments are waived). Interest also accrues in this plan (with a minor exception), and payments are often set low enough that unpaid interest grows each month even if borrowers make on-time payments. But if a borrower still has a balance remaining after making income-based payments for 20 years (and filing paperwork annually), the government will forgive it.
The CFPB’s case against Navient assumes that forbearance is always less beneficial than income-based repayment because it does not include the possibility of loan forgiveness, and that since many Navient borrowers are indeed enrolled in forbearance, Navient must have steered them to that option. Yet it is not clear that income-based repayment is the best choice for all borrowers all of the time, and, again, not all borrowers are even eligible for a lower payment. And even when income-based repayment is the best option, loan servicers cannot prevent borrowers from opting for a forbearance instead. Moreover, Congress and the Department of Education have given loan servicers few hard and fast criteria stipulating which options are best under what circumstances. Instead, they have deferred to borrowers and servicers to work it all out.
For the CFPB’s case to have any merit, then, the CFPB must produce evidence that Navient steered a borrower into forbearance when income-based repayment would have been better for that particular borrower. It now looks like the CFPB never had such evidence. In fact, the CFPB’s own witnesses, 15 borrowers the bureau says were harmed by Navient (out of the thousands the CFPB says were harmed in total), look more like witnesses Navient would bring to defend itself.
After the CFPB named these witnesses, Navient pulled its own detailed records for each borrower, including phone-call recordings, information the CFPB did not have when it filed the lawsuit. As Navient’s recent court filings show, the company had indeed informed all of these borrowers about income-based repayment through letters, emails, and phone calls, often repeatedly, and the borrowers either opted for forbearance or turned out not to be eligible for income-based repayment. In fact, after Navient began revealing this information, the CFPB withdrew over half of its initial 32 witnesses, ending up with 15.
Those revelations alone cast serious doubt on the CFPB’s case, but other facts that Navient provided about the witnesses, facts the witnesses themselves verified in depositions, are downright farcical.
One woman, whom the court documents identify as CC, is an attorney with a $450,000 household income who repeatedly lied to Navient about her financial situation in an attempt to gain access to benefits. The documents state:
During calls that year [with Navient], CC also claimed her husband had died. . . . Records show that CC and her husband — who is alive — purchased a $1 million home outside Chicago in 2012.
Needless to say, CC was not enrolled in income-based repayment because she was not eligible, although she was eligible for a forbearance. Another witness, RD, had been sent information about income-based repayment 35 times. It looks like she may not have been eligible either, which would explain why she did not enroll:
Instead, RD continued to miss payments on her student loans while consistently making payments on two luxury automobiles. Navient also attempted repeatedly to reach RD by phone when she was delinquent, but she often did not answer or hung up. Navient representatives successfully reached her on April 1, 2014 and October 17, 2014, and both times they requested income information to determine her [income-based-repayment] eligibility. On both calls, RD declined to provide this information. Instead, in August 2014, she enrolled in a forbearance online without speaking to a representative.
Could Navient have denied her the forbearance if it believed she would be better served in income-based repayment? Absolutely not. She is entitled to a forbearance under the law.
Another CFPB witness, known as KR, reminds us that some student-loan borrowers are just bad listeners (to put it kindly) and therefore do not fully understand their options. When they do not enroll in income-based repayment, it’s not evidence of some sinister plot:
In one instance, on June 28, 2012, KR called the [Navient] representative a “stupid b****” before asking what options were available. The representative responded that KR “might be able to apply for Income-Based Repayment,” and he interrupted her and asked for someone “more competent.” After she again offered [income-based repayment] as an option, KR responded, “Look, b****, I don’t want to talk to you.”
How likely is KR to fill out paperwork to enroll in income-based repayment? Not very. In fact, he never did. Yet in the CFPB’s eyes, he’s a victim. It does not appear to matter to the CFPB that, under the government’s rules, Navient cannot enroll borrowers in that program until they fill out the necessary paperwork.
There are other examples that suggest the CFPB’s case is not grounded in how the federal loan program really works. Some of the CFPB’s witnesses were enrolled in income-based repayment. But these borrowers had simultaneously obtained a forbearance because they deemed even the income-based payments unaffordable. Rather than steer borrowers away from income-based repayment, Navient had already enrolled these borrowers in it, but they wanted additional relief, so Navient granted them forbearances as well. Similarly, some witnesses used a forbearance to suspend payments while they worked through the income-based-repayment enrollment process. The CFPB concluded that the forbearances in these cases meant the borrowers must have been steered away from income-based repayment, failing to understand that the benefits are not mutually exclusive and often work together.
Another witness who was enrolled in income-based repayment became ineligible when his earnings increased. He called Navient after his payments then jumped. A representative explained other options for lower payments, including forbearance. That is yet another instance of the CFPB failing to contemplate — even among its own witnesses — that borrowers could be using a forbearance because they are ineligible for income-based repayment.
Some skeptics might wonder if these are cherry-picked examples. Not at all. In total, five witnesses were enrolled in income-based repayment, another five were ineligible for the plan, four others were informed about it repeatedly but never signed up, and the 15th witness has yet to be interviewed.
One wonders how this case can continue, or why it was allowed to proceed in the first place, if the CFPB’s own witnesses are effectively testifying in favor of Navient. The only explanation must be that the CFPB enjoys such extraordinary deference under the law, before the courts, and in the eyes of a credulous press that it needs hardly any evidence at all to drag companies through years of legal battles. The Navient case is exactly what early critics of the CFPB warned us would happen.