Sallie Mae Settles Charges of Cheating Servicemembers

The student loan megabank, Sallie Mae, and its newly formed servicing offshoot, Navient, have settled legal charges brought against them by the Justice Department, the Department of Education, and the Federal Deposit Insurance Corp. This trio of federal agencies alleged Sallie Mae has – for nearly a decade – been violating laws intended to protect members of the military who are on active duty. Under its portion of the settlement, the Justice Department will require $60 million in refunds as well as a $55,000 civil penalty. Under its part of the agreement, the FDIC will require an additional $30 million in refunds and a hefty $6.6 million in civil penalties. The Consumer Financial Protection Bureau has a separate investigation still pending, and that could result in even more restitution, fines and penalties.

Just what is Sallie Mae alleged to have done to deserve this regulatory wrath? Federal agency investigations uncovered evidencee that Sallie Mae and/or Navient violated a federal law that caps loan interest rates at 6% for members of the military. That law, the Servicemembers’ Civil Relief Act (SCRA) recognizes that credit and debt of active service members is a matter of national security, and that servicemembers should not be subject to exhorbitant interest rates, certain late fees and harsh collection practices in a variety of credit contexts including student loans.

In discussing his company’s role in the misconduct and ensuing settlement, Navient CEO John Remondi chalked it up to “processing errors.” That plain-vanilla phrase hardly sounds like remorse. Unless its CEO takes responsibility for mishandling the collection of these student loans, the misconduct could well continue in some other form. Civil penalties are meant to have a deterrent effect, but Remondi’s comment evinced a remarkably nonchalant attitude from someone facing millions of dollars in fines.

Meanwhile consumers who get billed by companies they have never heard from wonder: Just what is a “loan servicer” anyway? Previously, banks made loans, carried them on their own books, and collected the debt through their own employees. If there was an error, it was easy to trace it back to the loan origination or payment history. Today, however, few banks hold onto the loans. They have an affiliate do the processing and debt collection, or they outsource these functions entirely. In either case, the lender is responsible for the conduct of its servicing agents. Thus, Sallie Mae was on the hook here.

While active duty servicemembers are entitled to special protections under federal law, many state and some federal laws also protect civilian consumers against deceptive and predatory student loans. “The settlement comes amid increasing federal and state scrutiny of the student-loan industry,” reports the Wall Street Journal. Sallie Mae is on just about consumer advocate’s list of unpopular companies. Most students simply do not know their rights. But, once investigations begin to shed light on some of the collection practices its CEO dismisses as mere “processing errors,” Navient and Sallie Mae might find out that they have underestimated the intelligence of the American student body.