Consumer Financial Protection Bureau Should Drop Flawed Enforcement Actions

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This post is the fourth in a 10-part series on reform proposals for the Consumer Financial Protection Bureau. See below for previous posts.

While the Consumer Financial Protection Bureau’s role in enforcing consumer protection laws is important, there are times when it oversteps the mark and brings frivolous cases based on weak factual grounds or obscure legal theories. Two well-documented examples are the PHH case and the Ally Financial consent order, both pursued under the Obama administration.

During her confirmation hearing, Director Kathy Kraninger testified that she would pursue an enforcement strategy based on the rule of law. This is similar to the position taken by her predecessor, Acting Director Mick Mulvaney. Nevertheless, despite Director Kraninger’s testimony, the bureau continues to pursue another deeply flawed Obama-era enforcement action, CFPB v. Navient. The director should move swiftly to terminate that case and any others that lack clear evidence of wrongdoing.

In January 2017, the bureau brought suit against Navient for allegedly steering student loan borrowers into worse repayment plans, such as forbearance, as opposed to allegedly superior repayment plans, such as an income-driven repayment (IDR), by failing to adequately inform them of their options. The bureau alleges that Navient had a profit motive in doing so, as forbearance is quicker and easier for the firm than IDR. This allegedly caused borrowers to pay much more than they had to for their loans. As then-Director Richard Cordray said at the time:

At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today’s action seeks to hold them accountable.

There are a number of grave problems with the bureau’s accusations. First of all, IDR plans are not necessarily a superior choice, nor are they always available to consumers. Furthermore, some consumers voluntarily opt into forbearance, as evidenced by the witnesses deposed by Navient, discussed below.

Second, Navient would not necessarily have a profit motive in steering borrowers into these plans. As The Wall Street Journal highlighted, the Department of Education pays loan servicers such as Navient significantly less for accounts in forbearance than those in IDR.

Most importantly, however, is the fact that the bureau has entirely failed to demonstrate the harm alleged in the lawsuit. The bureau alleged that Navient had harmed “hundreds of thousands” of borrowers through its steering actions. Yet it has now been two years since the bureau’s lawsuit was filed and five years since its investigation begun, and it has not been able to demonstrate even a single instance where such harm occurred. During this time, Navient has produced an enormous amount of information, including 450,000 pages of documents, hundreds of hours of phone recordings and more than 30 written reports, and spent millions of dollars on legal fees.

In the suit, Navient asked the bureau to identify specific borrowers that were harmed by enrollment in forbearance. The bureau called forth 15 witnesses, who identified themselves as harmed by the practice in the bureau’s consumer complaint database, which has been shown to have severe statistical and economic problems.

In response to the witnesses, Navient produced its own records on each borrower, including phonecall recordings and customer notifications. Evidently, Navient had in fact informed all of these borrowers about their repayment options, often repeatedly, and sometimes under abuse from borrowers. When informed about their options, borrowers either were deemed not eligible for IDR, failed to sign up for IDR, or opted for forbearance. None were steered into forbearance.

Given the severe lack of evidence in the Navient case, it is baffling that the bureau has refused to drop the lawsuit. As Jason Delisle of the American Enterprise Institute writes, “One wonders how this case can continue, or why it was allowed to proceed in the first place, if the CFPB’s own witnesses are effectively testifying in favor of Navient.” That question is now in the hands of Director Kraninger, who should act swiftly to terminate the enforcement action rather than continue to drag it on for years to come. The bureau’s law enforcement function is important, but the enforcement actions it brings must be based on demonstrable harm due to a clear breach of the law.

Previous posts on reform proposals for the Consumer Financial Protection Bureau: