On Jan. 13, a coalition of 39 state attorneys general — led by attorneys general from Pennsylvania, Washington, Illinois, Massachusetts and California — reached an agreement with student loan manager Navient over of allegedly unfair, deceptive and abusive student loan granting and administration practices. The $1.8 billion settlement will no doubt be eye-catching, but perhaps equally important is the validation that state AGs are seizing on repayment capacity determinations as a source of potential claims for acts or practices. unfair and deceptive (UDAP). In recent years, this theory of repayment capacity has gained traction with MGAs as they combat what they perceive as “predatory lending” in a number of industries.[1]
Initial complaints from the AGs generally alleged that Navient violated state consumer protection laws by unfairly and deceptively granting student loans to:
- borrowers with low credit scores;
- who attended schools with low graduation rates;
- which included high interest rates and origination fees;
- had a high probability of default;
- for which there were no defined repayment options for borrowers unable to repay; and
- for which there was little or no chance for borrowers to break free in the event of bankruptcy.
The AG complaints also allege that Navient failed to sufficiently inform distressed borrowers of the existence of alternative contractual arrangements and failed to inform borrowers that it had recourse agreements in place with credit institutions. education in the event of default by the borrower.
On the maintenance side, complaints generally allege the following:
- Unfairly steer borrowers into costly forbearance. Navient allegedly misrepresented the suitability of certain federal loan repayment options for borrowers, failed to meaningfully disclose federal plans to help borrowers avoid default, misrepresented its willingness to work with borrowers, and offered forbearance plans to borrowers who demonstrated a long-term inability to repay.
- Unfair practices related to recertification. Navient allegedly failed to disclose the date a consumer must recertify an income-based repayment plan, misrepresented the consequences of failing to submit these documents, and failed to adequately notify borrowers who consented to electronic communication of the existence of the renewal notice.
- Unfair practices related to the release of the co-signer. Navient allegedly misrepresented the co-signer release requirements and created potential confusion as to what requirements are necessary for the co-signer release.
- Unfair practices related to payment processing. Navient allegedly made repeated errors in issuing and applying borrower payments and failed to implement adequate processes and procedures to prevent such errors from recurring.
Notably, Pennsylvania has alleged both UDAP under its Consumer Protection Act and Unfair, Deceptive, and Abusive Acts and Practices (UDAAP) under the federal Consumer Financial Protection Act.
Under the terms of the settlement, Navient agreed to forgive the remaining balance on nearly $1.7 billion in private student loans for nearly 66,000 borrowers, as well as provide $95 million in restitution to approximately 350,000 borrowers. federal student loans that have been placed in certain types of long-term loans. – long-term abstentions.
In addition, Navient must also:
- Maintain policies and procedures regarding:
- oral communications and prioritization of alternative reimbursement plans,
- oral and written communications regarding alternative repayment methods and account status,
- requests for support and resolution of account disputes, and
- post-default recoveries;
- Implement the appropriate release, payment and transfer of cosigner service practices and procedures;
- Designating staff to act as alternative reimbursement specialists and public service specialists and providing enhanced training to these individuals to help consumers determine eligibility for alternative payment plans and relief programs;
- Implement mandatory billing statement notices that include information such as the total amount owed and the name of a borrower’s current federal loan repayment plan;
- Implement mandatory written payment history requirements;
- Reform its payment processing practices to ensure the proper creditability of payments; and
- Avoid charging certain fees, such as a fee to enter forbearance status or multiple fees for a single late payment.
This regulation represents the thorough review of lending practices that we noted in our recent 2022 State GA Forecast article (click here), and continues a move by state and federal regulators to pay attention to repayment capacity of consumers in the origination of the loan. the context. In these cases, state attorneys general use their consumer protection laws and UDAP powers, arguing not that lenders engaged in affirmative misrepresentation, but rather that the lender should have known at the time. of the granting of the loan that the borrower would not be able to pay.[2]
Although this theory originated in the realm of mortgages, it has been extended to other types of loans, including the context of student loans with this Navient multi-state settlement. Three of the five states taking this multi-state enforcement action (Washington, Illinois, and Pennsylvania) advanced claims in their complaints under their consumer protection statutes and UDAP based on allegations that Navient (operating under the name Sallie Mae) “provided predatory subprime loans to students attending for-profit schools and colleges with low graduation rates, even though he knew the borrowers would be unable to repay the loans.”[3] This is consistent with the trend of applying repayment capacity under national consumer protection laws and UDAP to different lending industries and lending-adjacent industries. Beyond the context of student loans and mortgages, state attorneys general have advanced this theory in their investigations of auto lenders.[4] and debt settlement companies.[5]
Statutory repayment capacity requirements already exist in some cases, such as for credit card accounts under the Credit Card Accountability Responsibility and Disclosure (CARD) Act and for payday, short-term, and vehicle title loans engine under certain state laws. However, this concern seems to be shifting towards complementary products. During a November 2021 hearing before the House Financial Services Committee, Chair Maxine Waters specifically mentioned repayment capacity issues in the fast-growing buy now pay later (BNPL) space, which has been followed in December 2021 by the CFPB issuing orders to five companies offering BNPL products, with its topics of inquiry including the potential applicability or non-applicability of a range of consumer financial protection laws.
[1] News Release, Office of Attorney General Maura Healey, In largest settlement of its kind, AG Healey secures $27 million for thousands of Massachusetts consumers from subprime auto lender (September 1, 2021), https://www.mass.gov/news/in-largest-settlement-of-its-kind-ag-healey-secures-27-million-for-thousands-of-massachusetts-consumers the subprime auto lender; See for example, Final judgment, Commonwealth v DMB Financial, LLC., No. 1884CV01472-BLS1 (August 2, 2021), https://www.mass.gov/doc/dmb-financial-final-judgement-0/download; Complaint, District of Columbia v Opportunity Financial, LLC, No. 1:2021cv01233 (April 5, 2021), https://oag.dc.gov/sites/default/files/2021-04/OppLoans-Complaint-final.pdf.
[2] See for example, Com. vs. Fremont Inv. & To lend, 897 NE2d 548, 556 (2008) (stating that although mortgages issued by Fremont Investment & Loan’s did not violate federal or state laws and were not considered unfair by industry filing, they nevertheless violated Massachusetts law because the bank did not properly assess the consumer’s ability to pay).
[3] Common questions, Navient AG Settlement, https://navientagsettlement.com/Common-Questions (last visited January 14, 2022 at 10:17 a.m.). See also Complaint ¶¶ 133, 148-215, 468(a), Illinois vs Navient Corp., No. 2017-CH-00761 (Cook Cty. Chancery Div. January 18, 2017); Claim ¶¶ 9.1-9.5., Washington v. Navient Corp., No. 17-2-0111501 (Sup. Ct. Wash. Jan. 18, 2017).
[4] Complaint at ¶171, Commonwealth v. Credit Acceptance Corp., n° 20-1954 (August 28, 2020).
[5] Final judgment at (IV)(8)(h), Commonwealth v DMB Financial, LLC., No. 1884CV01472-BLS1 (August 2, 2021), https://www.mass.gov/doc/dmb-financial-final-judgement-0/download. The budget analysis should assess the consumer’s “total overall and discretionary income and detailed monthly expenses”. Identifier. to IV(8)(h)(i). DMB shall not enroll any consumer whose “monthly income, after expenses, is less than the cost of the DMB program”. Identifier. to IV(8)(h)(ii).
