Consumer Finance Insights
October 10, 2017

Pennsylvania AG Files Suit Against Nationwide Student Loan Provider and Servicer

On October 5, 2017, the Pennsylvania Attorney General’s Office (AG) announced that it had filed suit against a federal student loan provider and servicer (and its subsidiary) in the U.S. District Court for the Middle District of Pennsylvania, alleging violations of the Consumer Financial Protection Act (CFPA) and Pennsylvania Unfair Trade Practices and Consumer Protection Law (PA CPL).  The complaint asserts that the company harmed student loan borrowers by “peddling risky and expensive subprime loans that [it] knew or should have known were likely to default” and by “failing to perform core servicing duties.”

Specifically, the AG alleges that the company offered “packages” of loans to schools that included both prime and subprime loans, in order to be considered a “preferred lender” for the school.  The subprime loans offered as part of these packages allegedly had high interest rates and origination fees as high as 9% of the borrower amounts.  The AG also alleges that the company loosened its credit requirements, so as to provide loan packages to schools that covered subprime student borrowers.  The company allegedly did not disclose to borrowers that such high-risk loans were more likely to default.  Additionally, the company allegedly protected itself from losses associated with these loans through, for example, “credit enhancements,” where the educational institution – unbeknownst to the borrower – accepted some of the risk of default by subsidizing the borrower’s loan.

The AG further alleges that the company steered borrowers who were experiencing financial hardship into costly forbearances; failed to clearly inform borrowers when they needed to “recertify” certain information in order to renew their enrollment in income-driven repayment plans; and made repeated payment processing errors.

The AG seeks declaratory and injunctive relief; full restitution to borrowers; civil penalties; and costs.