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The Consumer Financial Protection Bureau, joined by two state attorneys general, sued the nation’s largest student loan servicer, Navient.

The lawsuit alleges that Navient, which was formerly part of Sallie Mae, “illegally failed borrowers at every stage of repayment.”

The offices of the attorneys general in Illinois and Washington filed similar lawsuits against the student loan servicing giant.

“Navient has failed to follow the law and caused borrowers needless anxiety and aggravation,” Richard Cordray, director of the bureau, said during a phone call with reporters. “We believe that Navient repeatedly creates obstacles to repayment by misallocating or misapplying payments. The company all too often fails to correct its errors unless a consumer stays vigilant, discovers the problem and contacts the company to insist that it be fixed.”

Navient services loans for more than 12 million borrowers -- the majority of which are contracted with the U.S. Education Department. The company, in total, services more than $300 billion in federal and private student loans, which covers more than one in four college borrowers nationwide.

The CFPB’s lawsuit comes in the waning days of the administration that created the agency and has championed it amid growing criticism from its targets and congressional Republicans. The incoming Trump administration and some members of Congress have pushed for removing Cordray as director and have more generally questioned whether the agency is exceeding its legislative authority in regulating student loans and other financial products and services.

In a company statement, Navient said, “The allegations of the Consumer Financial Protection Bureau are unfounded, and the timing of this lawsuit -- midnight action filed on the eve of a new administration -- reflects their political motivations. Navient welcomes clear and well-designed guidelines that all parties can follow, and we had hoped our extensive engagement with the regulators would achieve this objective.”

The company asserts that the lawsuit is seeking to impose penalties on Navient based on retroactively applying new servicing standards.

Both the Illinois and Washington state lawsuits also allege that Navient and Sallie Mae engaged in deceptive subprime lending in its loan origination business from around 2000 to 2010.

“Shockingly we found every type of borrower has been impacted,” Illinois Attorney General Lisa Madigan said, adding that students with very little means of repayment, as well as those who paid more on their loans in an effort to reduce the debt, had been affected. “We have an unprecedented level of student loan debt in our country, and millions of Americans are being held back from starting their lives.”

The CFPB also alleges that Navient and its subsidiaries failed to apply or allocate payments to borrowers' accounts and that the company repeatedly misapplied payments without correcting them. The lawsuit alleges that Navient also steered struggling borrowers into forbearance instead of federal repayment plans that would have allowed lower monthly payments. The agency alleges that Navient added up to $4 billion in interest charges from January 2010 to March 2015 to the principal balances of borrowers who were enrolled in multiple consecutive forbearances.

The consumer bureau also charges that Navient obscured information sent to borrowers who needed to meet critical deadlines in order to remain enrolled in income-driven repayment plans. Navient also allegedly misreported to credit-reporting companies that borrowers who had their loans discharged due to a severe or permanent disability, including disabled veterans, had defaulted on their loans when they had not.

The bureau and the state attorneys general are all seeking what could total billions of dollars in restitution for students and loan discharges, Madigan said.

“The action by the CFPB against Navient demonstrates the importance of having a strong and independent consumer watchdog on the side of students and working families,” said Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, in a statement. “We call on President-elect Trump to reject calls from Wall Street to fire CFPB Director Rich Cordray or to weaken the consumer watchdog.”

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