I thought I’d drag you along on my typical journey is researching and writing an article. This time it is about Navient and the miserable news the research uncovers. For every article you read of mine there is typically a few hours of reading and researching, much of which goes nowhere. But here is how it happens.
Starting Point – Chinnock v. Navient Corporation, Navient Solutions, Navient Student Loan Trust, Department of Education, Deutsche Bank Trust Company
I was alerted about a case removed to federal court from a local court in Ohio. The case alleged a similar issue that is chronic with student loans from National Collegiate Student Loan Trust. The allegation is Navient can’t produce sufficient evidence the debtor actually owes the loan.
When it comes to federal student loans the general assumption has always been if a loan is listed on National Student Loan Data System for Students then the loan is verified as owed.
The Chinnock situation is slightly different than the typical debt verification objection. In Chinnock the claim is “in July 2017 plaintiff paid off her loans in the sum of approximately $190,000. Not a single delinquency was ever incurred by plaintiff on her student loans.” However, “About a year later, in August 2018, however, agent Navient claimed to her that she owed eight (8) additional loans totaling several hundred thousand dollars to a pair of its principals.”
Objecting to the claim she owed more in student loans than was already paid in full Chinnock asked for proof she really owed these loans and “Navient refused to produce such documentation proving that their principals own such loans, and re_cently demanded that plaintiff begin making monthly payments of approximately $2,100 in December 2018 on such loans.”
If payments on the loans that could not be verified by Navient were not made, Navient is said to have stated, “if she did not begin making the payments as demanded, it would report her to the credit agencies and have her credit ruined. This threat is one of the illegal predatory practices Navient was been found guilty of in the 2014 Consumers Finance Protection Bureau Report.”
What I found intriguing about this case was Chinnock made an offer to Navient that she “would begin making payments as per Navient’s demands in the amounts and on the dates specified, with such payments being paid to the Clerk of Court to be held in trust until a final order is rendered by a court of final appellate jurisdiction regarding ownership of the eight loans in dispute. On Oct 30, 2018 Navient’s counsel rejected such temporary resolution because “Navient [is] unable to modify Ms. Chinnock’s payment terms.”
The Chinnock case asks a very important question that has not been answered to my satisfaction either. The complaint asks for a judicial determination on loan ownership and asks Navient to produce proof the Department of Education “is the owner of the loans it claimed it owns in this case.”
As the case says, “In the lending industry, whether the realty-loan industry or the student-loan industry, these Boyko decisions called an end to the loan industry’s “take-my-word- for-it-loan-ownership” ploy. Inconceivably, for years courts had simply accepted claims of loan ownership under such scheme in cases where the alleged owner of the loan was not the original lender-owner and thus could not produce (a) the original promissory note made payable to it, (b) any assignment document assigning the loan to it, and/or (c) the recorded chain-of-title verifying it to be the current loan owner.”
The complaint states, “Defendants Navient Student Trust 2014-3 [“Navient Trust”] and defendant United States Department of Education [“DoDE”] may prove their ownership of such loans by producing “The Three Proofs of Ownership:” the (a) the original promissory notes made payable to them as the original owner; (b) if they were not the original owner, producing the assignment documents assigning the loan from the original owner to subsequent assignee-owners, including them; and (c) producing the recorded chain of title showing them to be the current owner of such loans.”
Navient Student Trust 2014-3
The case mentioned a specific bucket of Navient student loans so I headed off to the Securities and Exchange Commission to see what the most recent filing about this security had to say. I wanted to see if it disclosed issues like the National Collegiate Student Loan Trust filings had.
In the 10-K filed for the Navient Student Loan Trust 2014-3 by Navient Funding and Navient Solutions, it is disclosed that there is ongoing litigation against this particular individual investment and others.
On March 30, 2018 Navient stated, “On January 18, 2017, the CFPB and Attorneys General for the State of Illinois and the State of Washington (collectively the “Attorneys General”) initiated civil actions naming Navient Corporation and several of its subsidiaries as defendants alleging violations of Federal and State consumer protection statutes, including the Consumer Financial Protection Act of 2010, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act and various state consumer protection laws. These civil actions are related to the aforementioned CIDs and the NORA letter that were previously issued by the CFPB and the Attorneys General. In addition to these matters, a number of lawsuits have been filed by nongovernmental parties or may be filed by additional governmental or nongovernmental parties, including other state attorneys general or private litigants, seeking damages or other remedies related to similar issues raised by the CFPB and the Attorneys General.
One such lawsuit was filed on October 5, 2017 by the Attorney General of the Commonwealth of Pennsylvania, naming Navient Corporation and Navient Solutions, LLC as defendants alleging claims and seeking legal and equitable relief that are substantially similar to claims made and relief by the CFPB and other Attorneys General. The Company filed its Motion to Dismiss on March 20, 2017 with respect to the Attorneys General actions and on March 24, 2017 with respect to the CFPB action. In April 2017, the CFPB filed their response to our Motion to Dismiss and in May 2017, we filed our response. A hearing on our Motion to Dismiss was held on June 27, 2017 and the Court denied our motion on August 4, 2017. On May 24, 2017, the WA AG filed their response to our Motion to Dismiss and on July 5, 2017, we filed our response. The Motion to Dismiss was denied on July 10, 2017, after a hearing. On May 24, 2017, the IL AG filed their response to our Motion to Dismiss and on June 30, 2017, we filed our response. A hearing on our Motion to Dismiss was held on July 18, 2017 and as of March 29, 2018, the Court has not ruled on the motion. In relation to the Pennsylvania Attorney General lawsuit, the Company filed its Motion to Dismiss on December 22, 2017. The motion has not been heard by the court.
As the Company has previously stated, we believe the suits improperly seek to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer and that the allegations are false. We intend to vigorously defend against the allegations included in these lawsuits and any subsequent lawsuits that may be filed by governmental or nongovernmental parties, including other state attorneys general or private litigants, seeking similar damages and remedies. At this point in time, the Company is unable to anticipate the timing of a resolution or the ultimate impact that these legal proceedings may have on the Company’s consolidated financial position, liquidity, results of operation or cash flows. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.
During the first quarter of 2016, Navient Corporation, certain Navient officers and directors, and the underwriters of certain Navient securities offerings were sued in three putative securities class action lawsuits filed on behalf of certain investors in Navient stock or Navient unsecured debt. These three cases, which were filed in the U.S. District Court for the District of Delaware, were consolidated by the District Court, with Lord Abbett Funds appointed as Lead Plaintiff. The caption of the consolidated case is Lord Abbett Affiliated Fund, Inc., et al. v. Navient Corporation, et al. The plaintiffs filed their amended and consolidated complaint in September 2016. The Court ruled on our Motion to Dismiss on September 6, 2017 and dismissed the complaint in its entirety without prejudice. The plaintiffs filed a further amended and restated complaint on November 17, 2017. The Navient defendants intend to vigorously defend against the allegations.
During the fourth quarter of 2017, Navient Corporation and certain Navient officers were named in two putative class action lawsuits filed on behalf of certain investors in Navient stock entitled Pope v. Navient Corporation, et al and Gross v. Navient Corporation, et al. These cases have been consolidated. The Navient defendants intend to vigorously defend against these allegations.
At this stage in the proceedings, we are unable to anticipate the timing of resolution or the ultimate impact, if any, that the legal proceedings may have on the consolidated financial position, liquidity, results of operations or cash-flows of Navient and its affiliates. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.” – Source
Lord Abbett Affiliated Fund
The mention that one of the investors in the Navient trust was suing made me curious to learn more. And that lawsuit is eye-opening. The suit includes both private and federal student loan portfolios.
Keep in mind, this suit is filed by an investor in Navient loans.
The complaint states, “Plaintiffs Lord Abbett Affiliated Fund, Inc., Lord Abbett Equity Trust – Lord Abbett Calibrated Mid Cap Value Fund, Lord Abbett Bond-Debenture Fund, Inc., and Lord Abbett Investment Trust – Lord Abbett High Yield Fund (“Plaintiffs” or the “Lord Abbett Funds”) bring this class action on behalf of themselves and all other similarly situated investors against Navient Corporation (“Navient” or the “Company”), one of the country’s largest servicers of student loans, as well as its President and Chief Executive Officer John F. (“Jack”) Remondi, Chief Financial Officer Somsak Chivavibul, Chief Operating Officer John M. Kane, and others for violations of the federal securities laws. As detailed below, Defendants made numerous false or misleading statements of material fact between April 17, 2014 and December 28, 2015, inclusive (“Class Period”), with respect to Navient’s business operations and financial results.
Defendants’ statements or omissions caused the price of Navient securities to be artificially inflated, and caused significant damages to purchasers of Navient stock and notes when they ultimately learned facts revealing that Defendants’ prior representations were false or misleading when made. The Lord Abbett Funds, who suffered more than $13 million in damages due to Defendants’ misconduct, seek a recovery through this action on behalf of themselves and other injured investors.”
The investor is upset by alleged misrepresentations made that prevented them from making informed decisions as an investor. But that’s not where this suit gets interesting.
The Lord Abbett Affiliated Fund suit goes deep into allegations that Navient significantly harmed, misled, and damaged student loan debtors it was servicing loans for.
The suit states, “Defendants repeatedly assured investors during the Class Period that forbearances were meant to afford temporary (not long-term) relief to borrowers, and that Navient engaged in a careful, borrower-specific evaluation of whether to grant forbearances. But in fact there was a pervasive and systemic practice at Navient, directed by senior management, of regularly and indiscriminately granting forbearances to struggling borrowers. Those undisclosed forbearance practices had three objectives.”
The complaint gives several reasons why Navient would do this. Of course, the underlying problem with the indiscriminate forbearance is it easily placed debtors in a position of owing more on their loans without constructive consultation. Debtors were steered into making a decision that was not in their best interests because of alleged Navient self-service.
The complaint makes the argument against this process from an investor point of view when it says, “First, Defendants aimed to avoid having to classify those borrowers as delinquent or in default, which would raise a red flag to analysts and investors that Navient’s loan portfolios were exposed to higher levels of risk than Defendants disclosed, and that the Company was in turn a riskier investment than Defendants portrayed to the market.
Second, misusing forbearances also allowed Defendants to manipulate Navient’s financial results. In particular, Defendants misrepresented Navient’s provisions for loan losses, an indicator of the level of risk to which the Company’s loan portfolios were exposed.”
It goes on, “Third, Navient placed borrowers into forbearance in lieu of counseling and enrolling them in alternative repayment programs, including income-driven repayment (“IDR”) plans.4 In doing so, Navient avoided (at borrowers’ expense) the higher operational costs associated with properly counseling and enrolling borrowers in such plans. That is, it would take significantly more time, and thus employee resources, to shepherd a borrower through the process of getting into an alternative repayment plan than simply to place her into forbearance. That, in turn, would necessitate hiring more personnel to meet the needs of Navient’s customer base. By eschewing its stated commitment to promote borrowers’ best interests, Navient artificially kept its operational costs lower than they should have been.”
Alleged Desception and Unfair Practices
The complaint is pretty damning when it talks about the culture at Navient. It states, “while Defendants represented to investors that Navient maintained a “robust compliance culture driven by a ‘customer-first’ approach,”5 the Company and its subsidiaries were actually engaged in a series of unfair and deceptive practices, including (1) misleading borrowers about the availability of IDR plans; (2) misadvising borrowers about the availability of releases of cosigners of borrowers’ loans; (3) misleading delinquent borrowers regarding the amounts they needed to pay to become current on their loans; (4) failing to disclose or properly address systemic processing errors and the inadequate systems in place to deal with those errors; (5) charging borrowers who had served in the military high interest rates on their loans, in violation of the SCRA, notwithstanding the February 2015 settlement between Navient Solutions and the DOJ for that very practice; and (6) deceiving borrowers regarding attributes of the federal loan rehabilitation program, which affords borrowers in default the opportunity to “rehabilitate” their loans and remove them from default status. Those unfair and deceptive practices are the subject of actions filed by the CFPB and state attorneys general (see supra at 2 n.1) asserting claims under the Consumer Financial Protection Act (“CFPA”), the Fair Debt Collection Practices Act (“FDCPA”), and state consumer protection laws. The Government Complaints assert, based in part on internal Navient documents, that the Company engaged in those practices systemically and repeatedly for years, including during much of the Class Period in this case.”
Former Employees Talk
To defend the position in the complaint regarding the abuse of forbearances offered to debtors, the complaint states, “Former Navient employees with direct knowledge of Navient’s undisclosed forbearance practices have recounted them in detail. A former Navient employee who worked as a Collections Supervisor from early 2014 until April 2015 (“CW 1”), for example, explained that the Collections Department’s “objective all of the time was to keep an account current” through using forbearances or other means of postponing payments borrowers were unable to make. Accordingly, CW 1 said, “[y]ou would never see us have a goal where it was ‘Let’s see how much money we can collect this month.’ It was how much can we postpone? How many forbearances can we slap on [an] account.” CW 1 stated this management directive was conveyed by CW 1’s supervisor but came from Navient District Manager/Senior Vice President of Default Prevention Troy Standish, who reported to Defendant John Kane. As a result of those practices, CW 1 explained, borrowers were misled and their accounts “were just growing and growing and growing.”
CW 1’s account is corroborated by a former Navient Collections Department Supervisor who worked at the Company from mid-2010 until October 2014 and supervised 25 Collections Agents (“CW 2”). CW 2 recounted that Navient Director of Operations Christi Hewes instructed CW 2 and others to encourage customers to obtain longer forbearances than they initially requested, as that would result in a longer period during which the account would show up as “current” on Navient’s books, “even though putting [borrowers] into our forbearance for 12 months drastically capitalizes a lot more interest and increases their loan substantially.”
CW 2 explained, moreover, that while CW 2 was at Navient, collections agents were incentivized by management, in order to be counted “number one by the number of loans [they] had,” to “put … [customers] in something that makes them look like they’re up to date for a longer period of time, even though by doing that every month the company is making like millions of dollars simply by the interest rate capitalizing,” and “if an agent [had] 50 accounts, that [was] the mindset for those 50 accounts.” CW 2 related that it “was negative for the customer. If the customer call[ed] in requesting the good thing”—i.e., a relatively short forbearance—“we were coached [by management] to coach our agents to do the bad thing” and convince the customer to obtain a longer one.
CW 1 recounted that to achieve a good performance rating, agents had just five and a half minutes per phone call with borrowers, during which agents ran down a list of questions concerning family size, whether the borrower worked part or full time, and whether the borrower received assistance, before sending off paperwork to qualify for a deferral due to unemployment; if there were no questions, the agent ended the call at that point. Further, CW 1 explained, while the paperwork was in process the loan was put into forbearance. According to CW 1, “[i]t’s not like [the borrower] was getting any information” during those calls about the impact on their balances.
A former Navient Department of Education Specialist II who worked at Navient’s Delaware headquarters from June 2014 until after the Class Period (“CW 3”) similarly recounted that Navient provided incentives to personnel for getting customers off the phone in the fastest amount of time. CW 3 indicated that CW 3 was pushed to work as fast as CW 3 could. CW 3 stated, “It was preached there to get someone off the phone as soon as possible.” CW 3 recalled that if CW 3 failed to get someone off the phone quickly, it was looked down upon by Navient management. CW 3 further noted there was a lot of miscommunication toward the borrowers about forbearance; CW 3 indicated that a lot of borrowers did not know what they were entitled to, and that Navient customer service representatives were responsible for the miscommunications.”
The CFPB and state attorneys general also made claims “Navient’s compensation policies incentivized its employees to place federal-loan borrowers into forbearance without adequately exploring IDR plans with those borrowers and, in some cases, without even mentioning such plans.”
Another reason customer service representatives at Navient are said to have not provided proper advice and counseling are said to be because, “a borrower seeking to enroll in an IDR plan must submit a paper or online application and include certain income tax documentation with it, the enrollment process sometimes requires multiple, lengthy conversations with the borrower. In its complaint the CFPB reports “[t]his is especially true considering that more than half of Navient borrowers who enroll in [IDR] plans for the first time report that they could not navigate the application process on their own.”10 Enrollment in forbearance, by contrast, can often be completed over the phone within minutes, and generally without submitting any paperwork. Further, a borrower enrolled in an IDR plan must also complete an annual recertification form to document her current income and family size, which is then used to adjust her payment amount. Processing that renewal paperwork further increases the time Navient employees must devote to borrowers who enroll in IDR plans. As the CFPB explains, “[a]s the volume of [IDR] plan applications and renewals received by Navient increases, Navient also has to increase the size of its staff to review and process those forms, thereby increasing operating costs.”11 Navient thus avoided those necessary operating costs by improperly placing borrowers into forbearance.”
This issue with pervasive forbearances is a problem because a forbearance may provide a payment holiday but it only increases the overall balance of the debt since interest is building while payments are not being made.
The complaint says, “Making things worse, Navient enrolled many borrowers in multiple, consecutive forbearances, even though the borrowers had clearly demonstrated a long-term inability to repay their loans. The Pennsylvania AG reports in its complaint that between January 1, 2010 and March 31, 2015 Navient enrolled over 1.5 million federal-loan borrowers in two or more consecutive forbearances totaling at least 12 months; approximately one million of those borrowers were enrolled in three or more consecutive forbearances, where each forbearance period lasted an average of six months, and more than 520,000 of the borrowers were enrolled in four or more consecutive forbearances.”
Investor Feels Misled and Lied to
The investor filing the suit against Navient does make an interesting argument when they say, “The pervasive and systemic use of forbearances at Navient, which Defendants did not publicly disclose, belied their representations to investors that (1) Navient engaged in a “careful use of forbearance,” (2) Navient applied forbearances “based on a customer’s unique situation,” (3) the Company’s forbearance policies “include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan,” and (4) Navient “continue[d] to see . . . continuing positive delinquency, forbearance and charge-off trends in connection with th[e] [PEL] portfolio.” Those statements accordingly were false or misleading when made.”
Navient Out of Control
Time will tell if Navient can produce evidence to prove Chinnock does owe on the alleged loans. I’m going to follow that case for sure.
But the fact investors in Navient loans are as equally upset as student loan debtors is very interesting to me. The big money investors appear to feel Navient was misrepresenting loan servicing to consumers and misrepresenting loan quality and performance to them.
From a corporate investor point of view, the complaint is filled with interesting claims and revelations. It seems the investor feeles misled by Navient as consumers and regulators feel. Navient is being attacked on all sides and is certainly not too big to fail.
I can’t cover all the investor issues here but you are welcome to read the full complaint below.
And That’s Where This One Ends
What you see above is the result of six hours of reading through multiple sites, documents, and distilling the information.
The starting point of this article is certainly intriguing. I can’t wait to see how it ends for Navient to prove the chain of ownership of the loans. If I was a betting man I would guess navient is going to want to settle this case out rather than set a prescedent.
We shall see.