Student Loan Servicer Faces Lawsuit for Predatory Lending Practices

Inside Subprime: Dec 25, 2018

By Grace Austin 

A student loan giant is facing a torrent of lawsuits brought by the federal government and several states, claiming deceptive and predatory lending practices.

The country’s largest student loan servicer, is fighting against lawsuits from the Consumer Financial Protection Bureau as well as Pennsylvania, California, Washington, Mississippi and Illinois. The loan servicer, which services more than $300 billion in federal and private student debt, is denying all charges.

The CFPB claims, since 2010, the loan servicer pushed student loan borrowers toward paying more than they needed to, in addition to other charges, like failing to apply correct payments, not informing borrowers of important information for repayment plans, and misreporting defaults to creditors. The federal consumer watchdog agency sued the student loan servicer in January 2017, saying that the loan servicer didn’t correct any of its bad practices after consumers complained.

In December 2018, it became public that the loan servicer subpoenaed former CFPB student loan ombudsman Seth Frotman in October, which some are claiming is an aggressive legal tactic designed to intimidate those seeking legal action against the company. Frotman publicly quit in the fall of 2018 over disagreements with the CFPB’s handling of student loan lending.

Illinois Attorney General Lisa Madigan also filed a lawsuit against the loan servicer in January 2017, saying the company mistreated “student loan borrowers from start to finish — from originating student loans, to servicing those loans, to collecting on defaulted student loans.” Madigan is seeking money back for student loan borrowers who she says were taken advantage of by the loan servicer. A judge denied a motion to dismiss that case in July 2018, meaning the lawsuit could go forward. And in Washington, Attorney General Bob Ferguson filed a lawsuit against the loan servicer in January 2017, saying it steered borrowers into high-interest loans they couldn’t repay.

The latest legal action on the state level involves Pennsylvania’s lawsuit against the student loan giant. Pennsylvania Attorney General Josh Shapiro sued the loan servicer in October 2017, accusing the company of steering borrowers toward more expensive repayment programs through forbearance, as well as not notifying borrowers about the steps needed to renew low-cost repayments. In late December 2018, a judge decided the case could move forward despite efforts by the student loan lender to dismiss it.

The judge’s decision encourages efforts by Pennsylvania and other states to go after student loan lenders, showing that lending companies can be held accountable on the state level. The loan servicer’s argument against state consumer protection laws is that the company follows federal guidelines, like the Higher Education Act. The U.S. Department of Education issued a memo in March 2018 backing up the argument that federal law overrules state law in such conflicting cases.

And in 2018, both California and Mississippi joined the number of states suing the loan servicer. California filed a lawsuit against the loan servicer in June 2018, and in Mississippi, the attorney general sued the student loan servicer in July 2018.

For more information on payday loans, scams, and cash advances and check out our state-by-state financial guides including Texas, Florida, Illinois and more.