On May 13, 2014, two consent orders were issued:  FDIC v Sallie Mae Bank and FDIC v Navient Solutions Inc. (formerly known as Sallie Mae, Inc.).  These are the results of the FDIC’s investigation into Sallie Mae’s alleged violations of the Servicemenbers Civil Relief Act (SCRA), Electronic Fund Transfer Act (EFTA), Equal Credit Opportunity Act (ECOA), and Federal Trade Commission Act (FTCA), as well as general “unsafe or unsound banking practices”.  What it really boils down to were allegations that Sallie Mae (SM) was charging more interest than was allowed to qualifying service members, requiring service members to provide more evidence of active duty than the SCRA requires, and (no surprise here) allegations that SM’s payment processing was designed to maximize profits in an unfair manner through deception and misinformation that made it confusing for borrowers such as uncertainty of when late fees would be assessed, and what the penalties were for making a payment for less than the monthly minimum payment.

Navient

Who or what is Navient?  It’s a new company, formerly known as Sallie Mae, Inc. (SMI).  SMI was a wholly owned subsidiary of SLM Corporation.  As of April 30, 2014 SMI reinvented itself as Navient and through stock manipulation became a separate company, no longer owned by SLM Corp.  There’s more to it, but not really worth boring you with the details (read the consent order if you’re that interested).

SCRA

Under the SCRA, active duty service members qualify for an interest cap of 6% on ANY (not just student) loan during periods of active duty.  SM failed to reduce service members’ interest rates to 6% when notified and in some cases ignored notification claiming additional proof was required.  As a result, SM must reset all eligible service members’ accounts as if SM had done it properly.  Further, SM must creates procedures to ensure compliance with the SCRA and other laws with regular audits, etc.  My favorite line in the SCRA corrective section is this, “The Bank shall ensure all appropriate Bank employees are adequately trained on the requirements of the SCRA.”  I find it funny that this even needs to be in the consent order.  At the same time it is sad that the word “adequately” is used to describe the standard of training required as this is a very subjective word.  SM thought it was already doing an adequate job.  Apparently not.

Payment Processing

The consent orders require SM and any servicer of SM loans to “clearly and conspicuously describe the Payment Allocation Methodology in cases of prepayment, Underpayment [paying less than minimum] and delinquency, and late fee assessment…and ensure that all billing statements contain a sufficiently clear and adequate summary of the servicer’s policies and refer consumers to the more detailed information available on the servicer’s website.” Some great points in the consent order:

• A requirement to allow borrowers and co-signers to opt out of group billing.  Consumers now have the right to request separate bills for each or just a few of their loans held or serviced by SM
• Borrowers and co-signers also have the right to direct how payments are to be allocated towards their loan(s).  They’ve always had this right.  The consent order drives the point home
• No more minimum late fees!
• Mandatory disclosure of all late fees – how much and when assessed

Penalties

Sure, it looks like SM owes a lot, but I don’t think this will hurt them.  SM Bank is required to put $30M in a reserve account for restitution.  Another $60M is to be set aside by SM Bank, Navient, and the big Sallie Mae Delaware for SCRA restitution.  The civil fines, payable to the US Treasury are minimal $3.3M from both SM Bank and Navient (that’s $3.3M each).  A grand total of $96.6M.  The truth is, most borrowers won’t see a dime because the consent order allows restitution to be paid as a credit to any account with a balance due.  How many affected borrowers have actually paid off their SM loans?  I’ll be it isn’t much.  Any of the $90M not used for restitution goes back to SM.  At the end of this, I don’t think this hurts SM all that much, if at all.

Lesson

I’m not sure there really is a lesson here. I think the penalty is rather small and will hardly be felt by SM.  While there was a small backlash from the military community, it did nothing.  SM’s service contract with the Department of Education was renewed, even while this investigation was moving forward, and against protest of the military.