Student Loan Related

Police Pension Plan Sues Navient for Bad Acts But Consumers Still Left Out in Cold

Written by Steve Rhode

Recently I wrote about this case where Navient was sued by an investment company.

It was eyeopening to see investor making alarming claims against Navient. The same sorts of claims made by the Consumer Financial Protection Bureau (CFPB) and the Attorneys General of some state.

In this case, the Plaintiff is the Buffalo Grove Police Pension Fund. They have filed suit against William Diefenderfer III, John Adams, Ana Cabral, Diane Gilleland, Katherine Lehman, Linda Mills, Jack Remondi, Jane Thompson. laura Unger, Barry Williams, Ann Bates, Steven Shapiro, Barry Munitz, Timothy Hynes IV, Somsak Chivavibal, John Kane, and Christian Lown.

The police pension fund is yet another institutional entity taking exception with the way things were run at Navient.

Here is what the pension plan alleges as a stockholder.

Summary of Claims

This stockholder derivative action arises out of the Board’s breach of their fiduciary duties in failing to diligently and disinterestedly serve Navient. Specifically, the Individual Defendants (defined below) knowingly caused Navient to manipulate its student loan servicing and collection practices to mislead borrowers, with regard to their rights, in violation of federal and state law. Navient caused borrowers to incur millions in additional costs. As the CFPB and multiple state attorneys general have alleged, Navient: (i) failed to advise borrowers to enter into appropriate income-driven repayment programs (“IDRs”), instead steering them to enter into costly forbearance, when not appropriate, in order to save on costs and create additional future interest (ii) failed to provide adequate notice to borrowers for submission of the required annual paperwork to keep lower, income-based payments and/or to allow cosigners to be released from loan obligations; (iii) misinformed borrowers regarding the benefits of loan rehabilitation programs and certain collection costs; (iv) committed repeated payment processing errors and failed to implement internal controls to prevent their re-occurrence, leading to misapplied payments and the false reporting loans as delinquent; and (v) misreported the status of military accounts. When the Individual Defendants no longer were able to conceal their misconduct under the mounting number of customer complaints that were attracting regulators’ scrutiny, Navient’s reputation suffered, wiping much of its and stockholders’ value. Unsurprisingly, this misconduct resulted in both regulatory and private action against the Company, including two securities class actions, as well as lawsuits by the CFPB and State AGs, causing both financial and reputational harm to the Company. Certain Individual Defendants also capitalized on Navient’s artificially inflated stock price before Navient’s conduct was made plain, making over $1.2 million dollars in stock sales.

Navient is a publicly traded company principally engaged in loan management and servicing of private and federal student loans for approximately 12 million customers with $300 billion in outstanding balances, including 6.1 million customers whose accounts are serviced under Navient’s contract with the U.S. Department of Education (“DOE”). Navient’s 2017 net income was $292 million.

Beginning in at least May 14, 2014, and continuing until at least January 2018 (the “Relevant Period”), Navient engaged in a widespread and systemic practice of regularly steering borrowers experiencing long-term financial hardship into forbearance, instead of counseling them to enroll in IDR plans, which were more appropriate for their situation. The Navient Board turned a blind eye while the Company violated federal law in order to avoid the operating costs associated with enrollment in IDR plans, which required extra administrative and time resources. Indeed, between January 2010 and March 2015, the number of borrowers enrolled in forbearance exceeded the number of borrowers enrolled in IDR plans. Notably, this practice occurred despite the fact that more than 50% of Navient borrowers, who needed payment relief and were eligible for an IDR plan, qualified for a $0 monthly payment.

Due to a lack of necessary internal controls and compliance measures, Navient’s customer service representatives also failed to adequately advise borrowers regarding a number of loan servicing issues. First, while Navient managed to circulate notices to borrowers, it failed to identify the applicable deadline by which their loan(s) was up for renewal in violation of state and federal law. Neither did Navient provide adequate language apprising its customers of the severe consequences of submitting an incorrect, incomplete, or untimely renewal form. Furthermore, borrowers who consented to receiving electronic notices only received a boilerplate email with a generic subject line that failed to alert borrowers in an IDR plan of the importance of the email, resulting in over 60% of borrowers failing to timely renew their IDR plan enrollment. Second, Navient imposed on their borrowers undisclosed hurdles to make cosigner release less attainable. For example, Navient did not disclose to borrowers that making no payment in response to a $0 balance monthly invoice would count as a failure to make an “ontime payment,” delaying the required 12 months of “consecutive, on-time principal and interest payments” in order for a cosigner to be released from payment obligations. Instead, Navient reset borrowers’ progress, thereby delaying their fulfillment of the eligibility criteria for cosigner release.

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Furthermore, in a direct violation of state and federal laws and regulations, Navient committed payment processing errors whereby Navient misallocated payments intended and/or designated for a specific loan. Navient continued to commit such errors despite being apprised of their occurrence and magnitude and failing to take any meaningful steps to reduce these errors. This caused borrowers and cosigners to incur improper late fees and increased interest charges, which Navient, in turn, reported inaccurately to consumer credit agencies, negatively impacting borrowers’ credit. Navient applied these sloppy procedures indiscriminately.

As a consequence of the Company’s practices in violation of the applicable state and federal laws and regulations, Navient’s customers frequently complained, only to be subject to the same error time and again. As a result of growing negative customer sentiment, many borrowers began to reach out to regulators, such as the CFPB and local agencies, which, in turn, recorded an increased number of complaints sharing the same underlying grievances.

Notwithstanding the nature of Navient’s forbearance practices and its failure to adequately service borrowers’ loans, the Individual Defendants continued to tout the credit quality of its loan portfolio, financial results, compliance with regulatory requirements, and liquidity and financing arrangements of the Company. Indeed, Navient’s regulatory filings with the SEC – including the proxy statement that accompanied Navient’s Spin-Off (defined below) from SLM Corporation (“Sallie Mae”) – are replete with managements’ assurances of Navient’s improved credit quality of its loan portfolio, positive delinquency and charge-off trends, “robust compliance driven culture,” and its capacity available under its credit facilities.

The Individual Defendants were well aware of Navient’s practices that were violative of the law, and that there were no effective controls to gauge whether further Company practices were compliant. Yet they failed to take any steps to prevent Navient’s illicit practices from continuing.

As a result, Navient’s Board has not, and will not, commence litigation against the Individual Defendants named in this Complaint, nor will they vigorously prosecute such claims, because they face a substantial likelihood of liability to Navient for condoning, and failing to stop, the Company from steering borrowers into forbearance and failing to adequately service their customers’ loans. The Navient Board also faces a substantial likelihood of liability because the Board members had actual knowledge that Navient and certain executives made false statements in violation of the federal securities laws. Additionally, the Individual Defendants face a substantial likelihood of liability to Navient for failing to correct and/or implement the necessary internal controls to prevent the harm to the Company that has occurred and is certain to continue to occur.

Moreover, while they knew Navient was engaging in the practices described herein, and while the Company’s stock traded at artificially inflated prices as a result, Board member Defendants William M. Diefenderfer, III (“Diefenderfer”), Ann Torre Bates (“Bates”), and Diane Suitt Gilleland (“Gilleland”) disposed of their personal holdings of Navient stock for a collective total exceeding $1.2 million. Thus, a pre-suit demand upon the Board is a useless and futile act, and Plaintiff rightfully brings this action on Navient’s behalf.” – Source

Consumers Remain Screwed

This and the other suit by the investment fund highlight how the actions of Navient allegedly cost sonsumers and investors money.

Through Navients misapplication of payments, inappropriate advice regarding forbearance, lack of enrollment in Income-Driven-Repayment programs, lack of clarity on IDR renewals and cosigners releases, inappropriate credit reporting, injury to military debts, and the poor advice given by customer service representatives; consumer have suffered substantially.

These suits attempt to fix the financial losses incurred by investors but there has been no general case to erase the federal student loan debt of consumers who now have inflated balances and penalties because of the actions of Navient.

If This Suit is Meritless, Then Why Has Navient Caved to the Police Pension Fund?

It appears as a result of the Buffalo Grove Police Pension Plan going after Navient, a settlement has been reached. Navient has apparently blinked.

Here is the proposed settlement Navient is agreeing to:

“In consideration of the Settlement, Navient has agreed to adopt the corporate governance changes below for a period of at least five years.

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a. Board Composition. Navient commits to appoint, or to have appointed, following receipt of Plaintiff’s Complaint, two new independent directors to the Company’s Board by the May 31, 2020.

b. Director Orientation and Continuing Education.

i. Within six months of their election or appointment, all new
members of the Board must receive training on applicable consumer protection laws and state collection laws; and

ii. In addition, every member of the Board shall receive annual training on compliance with such consumer protection laws, standards, and regulations.

c. Risk Oversight Disclosures. Navient shall prepare a summary of the
Board’s risk oversight responsibilities for publication on Navient’s publicly facing website. Navient shall provide Plaintiff with the summary prior to the date when Plaintiff’s final fairness papers are due with the Court.

d. Revisions to the Board’s Committee Charters. Navient shall review and revise, as necessary, the charter for each standing committee to ensure that each committee’s risk oversight responsibilities are clearly described. Navient shall provide Plaintiff with the final revisions prior to the date when Plaintiff’s final fairness papers are due with the Court.

e. Limitations on Directors and Audit Committee Service. Navient shall amend the Board’s Governance Guidelines to provide that: (i) the Chair of the Audit Committee shall not serve on the audit committee of more than one other public company’s board of directors; and (ii) any individual member of the Board will not serve as the chair of more than one committee or as a member of more than three committees.

f. Independent Director Meetings in Executive Session.

i. Navient shall amend the Board’s Governance Guidelines to require
the independent directors of the Board to meet in executive session at each regularly scheduled meeting of the Board, with a minimum requirement to meet at least four times annually, outside of the presence of any director who serves as an officer for Navient; and

ii. Navient shall amend the Board’s Governance Guidelines to provide that the independent directors shall have the power to call for reporting from any business unit at the executive session, including, without limitation, from audit and compliance segments.

g. Maintenance of Senior Executive Position(s) for Loan Servicing and Collections. Navient shall maintain at least one executive position at the Senior Vice- President level or higher whose primary areas of responsibility shall be: (a) loan servicing operations; and (b) loan-related collections efforts reasonably designed to achieve compliance with state and federal law.

h. Creation of a Loan Servicing and Collections Compliance Committee.

i. Navient shall create an executive-level Loan Servicing and Collections Compliance Committee;

ii. The executive(s) listed in §II.B.g. above, General Counsel/ Principal Legal Officer, and Chief Risk and Compliance Officer shall all serve on the Loan Servicing and Collections Compliance Committee;

iii. The Loan Servicing and Collections Compliance Committee shall report directly to the Company’s Audit Committee;

iv. The Loan Servicing and Collections Compliance Committee shall provide additional oversight of the Company’s loan servicing and loan-related collections efforts. Reports regarding these responsibilities shall be provided to the Company’s Audit Committee; and

v. The Loan Servicing and Collections Compliance Committee shall provide additional oversight of internal controls regarding the Company’s loan servicing and loan-related collections efforts. Reports regarding these responsibilities shall be provided to the Company’s Audit Committee.

i. Revisions to the Code of Business Conduct. Navient shall amend its
Code of Business Conduct to state the following (or similar language):

If you become aware of a failure by the Company to comply with loan servicing or collection procedures mandated by federal or state consumer protection laws and/or by the federal securities laws and SEC rules, regulations or guidance, or if you, or anyone else you are aware of, are asked to discharge your/their respective duties in a manner that fails to comply with any such rules, regulations, or guidance, you shall immediately report the event via email to [email protected]

j. Revisions to the Confidential Whistleblower Program. Navient shall require the Chief Risk and Compliance Officer to meet with the Audit Committee at least annually to present on and discuss the current Whistleblower Policy and to consider any amendments that the Chief Risk and Compliance Officer or Audit Committee recommends. – Source

While This is a Positive Step Forward…

Navient will get their wrists slapped, stockholders and investors will get some assistance, but it remains to be seen if the government will do anything to attempt to repair the damage caused by their appointed servicing agent.

Time will tell.

About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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