Sallie Mae has agreed to pay almost $100-million to settle claims that the student-loan giant failed to provide members of the military with an interest-rate reduction and imposed unfair late fees on other borrowers.
In a pair of settlement agreements with the Department of Justice and the Federal Deposit Insurance Corporation, Sallie Mae, which split into two companies on April 30, pledged to pay $90-million in restitution and refunds to borrowers, along with almost $7-million in civil monetary penalties and fines.
In a written statement issued on Tuesday, Jack Remondi, chief executive of Navient, the newly formed loan servicer and collection agency, offered "sincere apologies" to members of the armed services affected by the company’s "processing errors." He added that the company had made changes in its procedures and training programs "to prevent these mistakes from happening again."
Navient currently services $300-billion in loans and has a lucrative servicing contract with the Education Department. At a news conference on Tuesday, the secretary of education, Arne Duncan, said the department was reviewing whether the company had violated the terms of that contract. Asked if the agency might cancel the contract, Mr. Duncan said that "everything is on the table."
Attorney General Eric Holder, who appeared alongside Mr. Duncan at the conference, called the settlement a warning to other lenders and servicers "who would deprive our servicemembers of the basic benefits and protections to which they are entitled."
"This type of conduct is more than just inappropriate; it is inexcusable," he said. "And it will not be tolerated."
No Admission of Wrongdoing
In a complaint filed in conjunction with the proposed settlement, the Justice Department said that Sallie Mae had failed to provide members of the armed services with the 6-percent interest rate to which they were entitled under federal law. The complaint also accuses the company of improperly obtaining default judgments against members of the military.
In an audit conducted by the agency, only 7 percent of eligible borrowers received the full benefit; the remaining 93 percent continued to be charged over 6 percent, even though a majority of them had provided some proof of eligibility. Over 40 percent of those borrowers were charged at least $166 in excess interest, and nearly a quarter were charged more than $500.
Navient admitted no wrongdoing in the settlement, which must be approved by a judge to take effect, but agreed to pay $60-million to compensate the roughly 60,000 members of the military whom it allegedly overcharged, some as far back as 2005. In addition, the company will request that the three major credit bureaus delete negative credit histories caused by the allegedly improper default judgments.
The Justice Department will determine which borrowers are eligible for restitution under the agreement, and how much each will receive.
A separate settlement with the Federal Deposit Insurance Corporation will require Navient to refund $30-million in late fees to borrowers, and Navient and Sallie Mae Bank, the newly formed lender, to pay $3.3-million each in civil penalties. Navient will voluntarily refund $42-million more in late fees to potentially affected borrowers who are not covered under the agreement because their loans were originated by another lender.
According to the FDIC investigation, Sallie Mae's servicing arm (now Navient) allocated loan payments in a way that maximized late fees, and failed to provide borrowers with sufficient information on how to avoid the charges. In a statement, Navient said it had updated its policies and improved its borrower notifications.
The settlements were welcomed by Congressional Democrats and the Consumer Financial Protection Bureau, which released a report in 2012 that found that loan servicers were making it difficult for military borrowers to use their benefits. In a written statement, Holly Petraeus, assistant director of the bureau’s Office of Servicemember Affairs, called Sallie Mae’s behavior "unacceptable."
"It’s particularly troubling," she added, "from a company that benefits so generously from federal contracts."