Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Thursday, May 15, 2014

Sallie Mae Braces For Nearly $200 Million In Penalties As Education Department Ponders Next Move

Sallie Mae and its former loan servicing unit have struck a deal with federal authorities to resolve allegations that the nation's largest student loan company cheated active duty troops, as well as other borrowers who were being charged late fees.

The two companies more than doubled to $173 million the amount they have set aside to cover settlements resolving allegations brought by the Federal Deposit Insurance Corp. and the Department of Justice.

The increase in the expected cost -- which could grow by the time the expected settlements are finalized -- comes as the Department of Education faces pressure from Senate Democrats and student advocates to suspend or terminate its loan servicing contract with Sallie Mae's former loan servicing unit, now known as Navient, for its alleged lawbreaking. Meanwhile, Sallie Mae's bank is contending with the possibility that federal bank regulators may require it to suspend its dealings with Navient.

The disclosures regarding the updated settlement costs were contained in documents the two companies filed late Friday with the Securities and Exchange Commission. Companies and government agencies typically make public embarrassing information on Friday afternoons to avoid scrutiny.

Navient acknowledged that the federal government's investigation into allegations the company cheated active-duty troops in violation of the Servicemembers Civil Relief Act covers "all loans" it serviced from Nov. 28, 2005 until now. The company services loans on behalf of the Education Department, and its contract with the government forbids it from breaking the law. James Runcie, chief operating officer for the Education Department's Office of Federal Student Aid, told senators in March that the department hadn't found a "wholesale" violation by the company of its contract.

Sallie Mae, the nation's largest student loan company, in recent weeks split into two businesses, Navient, focused on collecting loan payments and recouping money from borrowers who default, and a bank focused on making new private student loans.

In January, it had pegged the total anticipated cost of the settlements at $70 million.

Pending probes from the Consumer Financial Protection Bureau were not included in the tally of anticipated costs, an indication that the watchdog agency does not intend to join settlements being negotiated by the Department of Justice, Federal Deposit Insurance Corp., and the Education Department. Sallie Mae and Navient will almost certainly have to pay costs associated with the CFPB investigations to get in the government's good graces as well. Sallie Mae said Navient would pick up most of the tab.

Last month, in two separate news stories, The Huffington Post reported that federal investigators had found evidence that Sallie Mae violated the service members law in the company's handling of requests from troops with federal student loans, and had made the discoveries at least two months prior to when the Education Department told the company it intended to renew its lucrative servicing contract.

The federal government has not publicly accused Sallie Mae or Navient of wrongdoing in connection with the pending investigations. Representatives for the Education Department, Justice Department, FDIC, and CFPB either declined to comment or did not respond to requests for comment.

Because the service members probe focuses in part on federal student loans, Sallie Mae and Navient have been under fire for potentially violating the Education Department contract.

"We have always sought to administer SCRA benefits in accordance with the law's requirements and in a manner that helps eligible customers receive their benefits quickly and easily," said Sallie Mae spokeswoman Martha Holler.

"We strongly support our military customers and we make it as easy as possible for service members to get the information and service they need to access their SCRA benefits," said Navient spokeswoman Patricia Christel. "The majority of our dedicated military benefits team has a loved one who has served, and they are proud to assist thousands of service members each month. We look forward to resolving discussions with our regulators very soon."

The loan servicing contract, now held by Navient, requires the company to comply with all relevant federal and state laws at all times. The Education Department could terminate the contract if the company violates its terms, Education Department officials have said.

Sen. Patty Murray (D-Wash.) and Sen. Elizabeth Warren (D-Mass.) are among a group of federal lawmakers pushing the Education Department to crack down on Navient for its alleged wrongdoing. The American Association of State Colleges and Universities, the American Federation of Teachers, the National Education Association and the United States Student Association, among others, have called on Education Secretary Arne Duncan to suspend the department's contract with Sallie Mae.

In a December letter to Duncan, the groups said that student borrowers can't expect to enjoy the basic consumer protections provided to millions of Americans who take out loans because the Education Department fails to hold its loan servicers accountable.

Sallie Mae and Navient said the alleged wrongdoing covers conduct going back to November 2005, which is when Sallie Mae established a bank regulated by the FDIC. Sallie Mae Bank already is subject to a 2008 order from the FDIC prohibiting it from breaking the law.

In that order, the FDIC faulted the bank for "inadequate oversight" of its relationships with affiliates and other service providers that interact with customers on the bank's behalf, and for engaging in "deceptive" practices that violated the Federal Trade Commission Act. At the time, Sallie Mae Bank neither admitted nor denied the allegations.

Sallie Mae Bank is now in the FDIC's crosshairs because of the way the parent company's servicing unit, now known as Navient, serviced its loans. Navient said it had earmarked $30 million to be made available to borrowers charged with certain late fees for loans owned or originated by Sallie Mae Bank. It added that it had "voluntarily" set aside $42 million to refund borrowers whose loans were neither owned nor originated by Sallie Mae Bank to ensure all borrowers are treated similarly.

Because Sallie Mae Bank was previously faulted for its oversight of its vendors, a category Navient now falls into as a result of its spin-off from Sallie Mae, the bank now faces the possibility that the FDIC may prohibit it from using Navient to service its student loans. In the wake of the foreclosure crisis, which spawned illegal practices such as so-called "robosigning," bank regulators have cracked down on banks for faulty oversight of their vendors.

"Financial institutions are solely responsible to regulators for vendors' actions to the same extent as if the actions were taken by the institutions themselves," lawyers at Pepper Hamilton LLP, a law firm that advises banks, said last year.

Allegations that Sallie Mae and Navient violated service members' consumer rights have touched a nerve in Washington, where lawmakers often attempt to highlight their support for America's troops. Warren and Sen. Sherrod Brown (D-Ohio) have long been critical of the quality of student loan servicing, but Murray and Sen. Tom Harkin (D-Iowa) only recently began criticizing Sallie Mae over its servicing practices.

Under the Servicemembers Civil Relief Act, loan companies must reduce the interest rate on student loans to no more than 6 percent upon request by active duty troops. The law extended beyond private student loans to include federal student loans beginning in 2008.

The Justice Department only began vigorously enforcing the law in the past few years. Student loan companies have had a difficult time complying with it.

The law states that once a service member requests the interest-rate cap, it's in effect for the duration of active-duty status. Troops don't have to be in combat zones to qualify for the benefit.

According to the CFPB, service members have complained that companies such as Sallie Mae and Navient have told them they could not receive protections under the law unless their loans were in forbearance or deferment.

Troops also have told the CFPB that their servicers wrongly told them the 6 percent interest-rate cap expired annually, and they were required to submit additional paperwork to retain it. Others were discouraged from applying for the protections contained in the service members law, while some were mistakenly told that the benefits are only available to those in combat zones.

Some service members told the CFPB that they were told to provide end dates for their tours on active duty, a requirement the CFPB has said is virtually impossible to meet, since officers in the armed forces are usually not told when their tours will end.

Last year, Rohit Chopra, the consumer bureau's top student loan expert, told the Senate that companies that fail to comply with the service members law may be cheating borrowers in other ways.

"Admittedly, military families are a small segment of the population," Chopra said. "But if a servicer is unable to provide adequate service to those who have special protections under the law, it raises questions about whether it is agile enough to deal with the complexities of the larger population of borrowers facing hardship."

Thus far, Sallie Mae and Navient are the only companies to disclose that they're under investigation for allegedly violating the service members law when it comes to student loans. Nelnet Inc., a publicly-traded student loan specialist that also has a contract with the Education Department, is not under investigation for harming service members, said Nelnet spokesman Ben Kiser.

In its securities filings, Navient appeared to blame the federal government for its alleged law-breaking.

A potential settlement with authorities would penalize the company for not complying with what it described as the DOJ's "new approach" to the service members law, Navient said. This new approach would be retroactively applied to November 2005, and the company would pay the federal government penalties based on that.

A June 2011 letter from the Education Department to Washington trade groups representing student loan companies helps to illustrate Navient's position.

Service members wishing to have the interest-rate cap applied to their loans had to provide a copy of their military orders when requesting the benefit. But in the letter, which served as a response to questions from the industry over how best to comply with the service members law, Pamela Moran of the department's Office of Postsecondary Education made clear that service members had to provide the end dates of their active-duty tours when requesting benefits, and that they had to specifically ask for the interest-rate benefit. Vague requests needn't be honored.

The Huffington Post asked the Education Department whether it had consulted with the Defense or Justice departments in drafting the June 2011 letter, and whether the department intended to disqualify officers, whose orders typically don't have end dates. The Education Department did not respond to multiple requests for comment, nor did it confirm the authenticity of Moran's letter.

A 2012 settlement between the Justice Department and credit card specialist Capital One suggests the Justice Department treats the service members law differently than the Education Department does.

As part of the settlement, federal prosecutors required Capital One to check a Defense Department database whenever it's unclear that a service member is on active duty. The Justice Department also required Capital One to only seek out military orders that identify the start of a borrower's active-duty service. The company was forbidden from requiring military orders that specified end dates.

"With or without an end date, our policy has always been to process the 6 percent SCRA interest rate reduction benefit," said Christel, the Navient spokeswoman. "If the orders do not have an end date, our policy is to process the 6 percent SCRA interest rate reduction benefit for a period of one year, and then automatically extend beyond the year-long period after checking the Department of Defense military personnel database."

Christel said the company never required annual certifications from service members. Navient also never discouraged service members from utilizing the protections available to them under the service members law, she said.

A settlement resolving the service members' allegations would need to be approved by the Education Department, Navient said. The company added that it would be required to establish a $60 million fund to compensate aggrieved troops.

Original Article
Source: huffingtonpost.com/
Author: Shahien Nasiripour

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