Amid heightened regulatory scrutiny in the U.S. student loan industry, Navient Corporation (NAVI) has been hit with a lawsuit by the Consumer Financial Protection Bureau (CFPB).

According to the release by the CFPB, Navient – the nation’s largest servicer of both federal and private student loans – has been accused of “systematically and illegally failing borrowers at every stage of repayment. ”The CPFB stated that the company had created hindrances in repayment by providing misleading information, processing payments inaccurately and failing to act on borrowers’ complaints.

CFPB Director Richard Cordray mentioned, "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.”

Acting as an important medium between borrowers and lenders, servicers are engaged in key functions of managing borrowers’ accounts, processing monthly payments and directly communicating with borrowers. Very often, the servicer is different than the lender and a borrower typically has no control over which company services a loan.

Navient – which was spun off from Sallie Mae in Apr 2014 – currently services student loans for over 12 million customers. This includes 6.2 million customers on behalf of the U.S. Department of Education.

The CFPB highlighted that in stressed conditions, borrowers are entitled to opt for repayment plans that facilitate a lower monthly payment. However, it believes that Navient pushes many borrowers into forbearance – an option, which although allows borrowers to refrain from making payments for a short period, interest continues to add up during such period.

In fact, from Jan 2010 to Mar 2015, Navient added up to $4 billion in interest charges to the principal balances of borrowers who were under several, consecutive forbearances. CFPB believes that had Navient abided by law, a large part of these charges could have been avoided.

The consumer watchdog further alleged that Navient harmed the credit reports of disabled borrowers, including severely injured veterans as it misreported to the credit reporting companies that borrowers had defaulted on their loans, when such loans had actually been forgiven under government programs.

On Wednesday, the Illinois and Washington state attorney generals' offices filed separate lawsuits against Navient, accusing the company for resorting to unfair and deceptive practices tied with origination, servicing and collection of student loans.

Navient to “vigorously defend”

In a statement Navient noted that the allegations of the Illinois Attorney General and the CFPB “are unfounded, and the timing of this lawsuit—midnight action filed on the eve of a new administration— reflects their political motivations.”

The Wilmington, DE-based company also added that it supports guidelines that all parties can follow. However, it believes that the lawsuits are inappropriately trying to impose penalties on Navient based on new servicing standards “applied retroactively and applied only against one servicer”.

It further stated, “The regulator-asserted standards are inconsistent with Department of Education regulations, and will harm student loan borrowers, including through higher defaults.”

Additionally, Navient mentioned that it will “vigorously defend” against the allegations.

Stock Performance

Navient’s shares have gained a solid 83.2% in a year's time, significantly outpacing the 34.4% growth for the Zacks categorized Consumer Loan industry. However, we see limited upside for the stock in the near term given the several challenges including regulatory headwinds and rising expenses. Notably, the company has witnessed its 2016 estimates revising downward over the last 30 days.

Navient currently carries a Zacks Rank #4 (Sell).

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