State and federal lawsuits were filed this week accusing Navient, the largest collector of student loan payments in the nation, of the kind of tactics that we saw in the mortgage market in the years after the financial crisis.
Joe Cioffi Chair of the Insolvency, Creditors’ Rights & Financial Products practice group at law firm Davis & Gilbert, says there are certain similarities with the subprime mortgage crisis: “Prior to 2007, few, if any, knew how overburdened, outmanned and poorly equipped subprime mortgage servicers were to deal with widespread defaults. When the housing market crashed, they really got exposed. Then we found out that servicing operations in many cases actually exacerbated the subprime crisis and investor losses through misinformation to borrowers, misapplied payments and failing to properly follow modification procedures. If the CFPB’s allegations against Navient bear out, we may find that improper servicing is similarly contributing to student loan delinquencies by misinforming and misleading borrowers, including regarding possible relief through income based payment plans.”
On the growing sentiment in favor of student loan borrowers, Joe says: “Common perception is that it is nearly impossible to overcome the “undue hardship” exception and get student debt discharged. While it is a tough standard, it’s not impossible to meet and more importantly, it’s not a defined term in the Bankruptcy Code, so it is interpreted by a judge whose rulings may reflect the current times and public sentiment. The growing concern over the amount of delinquent loans and their perceived ‘unshakeability’ should reach a new level in the wake of allegations against the large servicer, Navient. It may be that servicers are misleading borrowers as to their repayment options, leading to more defaults. Depending on how the case proceeds and public reaction evolves, we may find more borrowers attempting to discharge their student debt and more courts willing to allow it.”
“Regarding the uncertainty of the new administration’s impact on student loans, Joe says the following: “I don’t think we can be certain how a Trump administration will deal with the student loan problem. On one hand, his negative views of the current head of the CFPB and even regulation generally is well-documented, but he has also proposed more borrower favorable income based repayment plans which would allow for earlier extinguishment of debt versus current plans and his inauguration speech struck a decidedly populist tone.”