California Attorney General Xavier Becerra announced a lawsuit against Navient Corp. and its subsidiaries on behalf of the estimated 1.5 million borrowers living in the state, alleging misconduct in the servicing and collection of federal student loans.

The action appears to be the latest effort by a state regulator to step in to fill the perceived gaps left by the less active Bureau of Consumer Financial Protection (CFPB), particularly in the wake of the Bureau’s decision to dismantle the Office for Students and Young Consumers.

What happened

On behalf of borrowers in California, the attorney general accused Navient of violating the state’s Unfair Competition Law (UCL) and False Advertising Law (FAL) by steering vulnerable borrowers toward more expensive repayment plans, failing to adequately disclose how students could attain income-driven repayment recertification, misrepresenting the order in which it would apply overpayments, failing to properly discharge the federal student loans of borrowers with a total and permanent disability, and misrepresenting the “present amount due” to delinquent borrowers.

“Navient and its debt-collection subsidiaries have committed significant and pervasive violations of California’s consumer-protection laws against thousands—if not hundreds of thousands—of student-loan borrowers in California,” according to the complaint. “At every turn, Navient has failed to live up to its responsibilities in servicing federal student loans.”

For years, the company promised borrowers that it would counsel them on various reduced-repayment options in light of their financial situation but instead pushed them into the short-term forbearance option instead of an alternative repayment plan, which could have saved borrowers thousands of dollars, the AG said.

“Navient did this to save itself time and money,” the complaint alleged, because the company incentivized its employees by financially rewarding customer service representatives for shorter average call times. Counseling a struggling borrower to enroll in an alternative repayment plan requires an application and “multiple, lengthy conversations with a Navient representative,” the AG said, especially when the borrower has questions or difficulty with the application process.

Instead, the complaint alleged, customer service reps pushed borrowers into the forbearance option, a “last resort” measure that could be accomplished in just a few minutes. In some instances, representatives completely failed to mention the availability of income-driven repayment plans at all, the AG claimed. “Due to the incentive structure … Navient representatives have routinely failed and continue to fail to do what the company promised: counsel financially distressed borrowers about the repayment options available to them and enroll them in the most appropriate and affordable repayment plan for their particular financial situation,” the complaint stated.

Other examples of the defendant’s allegedly deceptive conduct include failing to provide proper notice of the procedure for and consequences of not recertifying income-driven repayment eligibility and misrepresenting its method for applying payments to borrowers’ loans.

While Navient had no problem getting specific in emails reminding borrowers that a payment was due, Becerra said the company sent messages with vague, general subject lines, such as “New Document Ready to View,” about the need to recertify, resulting in a large percentage of federal student loan borrowers failing to timely recertify their plan enrollment in income-driven repayment, the AG told the court.

As for the misrepresentations about the order of applying payments, the company, both on its website and the back of every paper bill, encouraged borrowers to pay down their principal balances but, in actuality, applied all payments “according to a strict waterfall method: first to fees, then to interest, and lastly to principal,” the AG alleged.

Navient also misrepresented the amount needed to bring delinquent borrowers’ loans current (instructing representatives to demand the “present amount due,” a figure that includes both the amount due plus the next monthly payment), according to the complaint, and improperly reported total and permanent disability discharges to consumer reporting agencies as defaults (harming borrowers’ credit scores).

The AG also cited several of the defendants’ debt collection practices as violating state law.

In addition to injunctive relief to halt Navient’s allegedly deceptive and misleading actions, the complaint requests monetary judgments and a civil penalty of $2,500 for each violation of the state laws.

To read the complaint in California v. Navient Corp., click here

Why it matters

The California AG did not hold back in its complaint against the country’s largest student loan servicer (with more than 12 million borrowers nationwide and north of $300 billion in federal and private student loans). “Our families are now facing a student loan crisis,” Becerra said in a statement. “Navient’s loan servicing abuses have compounded the misery of parents and students who sacrificed to pay for college. Our students can’t afford to be cheated out of any more money than they legally owe simply because Navient knew how to game the system. We are ready to hold Navient accountable.” The attorney general’s efforts on behalf of student borrowers—in particular, using California's UCL and FAL in a manner similar to previous claims by the CFPB of unfair, deceptive or abusive acts or practices (UDAAP)—appear to be filling the perceived void left by the less aggressive CFPB, particularly after the Bureau dismantled its student lending unit.