The Consumer Financial Protection Bureau and two states on Wednesdaysued the nation's largest student loan servicer, Navient, formerly part of Sallie Mae, for allegedly systematic failures in processing loan payments and failing to enroll borrowers in less expensive repayment plans.

The CFPB alleged that Navient added $4 billion in interest charges to the principal balances of borrowers by enrolling borrowers in multiple, consecutive forbearance plans instead of in cheaper, alternative repayment plans.

The CFPB said in a press release that "a large portion of these charges could have been avoided had Navient followed the law."

"Too many borrowers paid more for their loans because Navient illegally cheated them and today's action seeks to hold them accountable," CFPB Director Richard Cordray said in a press release.

But Navient indicated it will not go down without a fight. In a strongly-worded press release, the company challenged the bureau's allegations while claiming the suit reflected the CFPB's "political motivations."

The servicer said it had rejected an "ultimatum" presented by the CFPB to agree to a settlement by Friday or be sued. The release suggests the CFPB was trying to act before the inauguration on Friday of President-elect Trump, who is said to be considering undoing many CFPB policies.

Yet the CFPB was investigating the company well before the election. Navient hadtold investors in 2015 that it was the subject of a CFPB investigationfor violations of consumer protection laws.

"The allegations of the Consumer Financial Protection Bureau are unfounded, and the timing of this lawsuit—midnight action filed on the eve of a new administration—reflects their political motivations," the company said in Wednesday's press release. "Navient welcomes clear and well-designed guidelines that all parties can follow, and we had hoped our extensive engagement with the regulators would achieve this objective. Instead, the suit improperly seeks to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer."

Seth Frotman, the CFPB's student loan ombudsman, declined to answer a question on a conference call with reporters Wednesday about whether the bureau had sought a settlement with Navient.

The lawsuit was filed in the U.S. District Court for the Middle District of Pennsylvania. In addition to Navient, of Wilmington, Del., the suit also names two of its subsidiaries, Navient Solutions, a servicing arm, and Pioneer Credit Recovery, a debt collector.

Navient is the largest student loan servicer in the U.S., servicing one out of four student loans, with 12 million borrower-customers, half of whom have loans under its contract with the Department of Education.

Student loan debt has skyrocketed to $1.3 trillion from $600 billion in 2006.

"For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans," Cordray said. "At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs.

The CFPB was joined by the states of Illinois and Washington, which also added different violations including that the servicer engaged for years in "unfair, deceptive or abusive acts or practices," known as UDAAP.

Illinois Attorney General Lisa Madigan told reporters on a conference call Wednesday that Navient, when it was Sallie Mae, targeted students at the "worst schools," and at "poorly accredited for-profit" colleges with high-interest loans. She compared Sallie Mae to subprime lenders during the housing crisis in 2008.

"We're talking about violations that occurred in Illinois in terms of origination, servicing and debt collection," Madigan said. "For subprime origination, we do not believe those loans should have been made in the first place, and those people should have those loans discharged. In addition, people should be provided with restitution on those and we believe servicing standards need to be uniform and proper."

Shannon Smith, a senior counsel with Washington state's attorney general's office, said on the call with reporters that Navient and Sallie Mae had "saddled borrowers nationwide with loans they could not hope to repay."

"Tellingly, these subprime loans were made as loss leaders, as part of a preferred lending program with schools in order to gain access … to prime student loan borrowers," Smith said. "These loans were designed to fail, they were never intended to perform. And the method by which these loans were made were unfair and deceptive."

The CFPB has tried to crack down on student loan servicers for engaging in sloppy practices that have long created obstacles to repayment and have raised costs and forced some struggling borrowers to default.

Among the allegations, the CFPB alleged that Navient misreported to credit bureaus loans defaults by disabled borrowers, including severely injured veterans who were eligible for loan discharges.

Still, the crux of the lawsuits deal with changes made in 2009 that allowed federal student loan borrowers to make payments based on how much money they earn by enrolling in income-driven repayment plans, part of the federal effort to make student loans more affordable. Borrowers enrolled in the plans may be eligible for loan forgiveness after 20 to 25 years of monthly payments.

The CFPB said Navient failed to provide "the most basic functions of adequate student loan servicing at every stage of repayment for both private and federal loans."

The company provided bad information in writing and over the phone, processed payments incorrectly and failed to act when borrowers complained, the CFPB alleged.

Navient "systematically made it harder for borrowers to obtain the important right to pay according to what they can afford," the agency said.

The bureau also alleged that the company deceived borrowers about the requirements to release co-signers from the loan. The CFPB lawsuit cited violations of the Dodd-Frank Act, the Fair Credit Reporting Act and the Fair Debt Collections Practices Act. The CFPB and the states are seeking monetary compensation for consumers harmed by the practices. The CFPB also is seeking to stop the alleged illegal conduct.

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