Justice Department Takes Action Against Sallie Mae

Attorney General Eric Holder said Sallie Mae's actions are "inexcusable" and will not be tolerated.

U.S. Attorney General Eric Holder and Education Secretary Arne Duncan, left, hold a news conference at the Justice Department on May 13, 2014, in Washington, D.C. Holder announced that the Justice Department has reached a $60 million settlement with Sallie Mae after it was discovered the student load giant charged roughly 60,000 military service members excessive interest rates on their education loans.  (Photo by )

U.S. Attorney General Eric Holder and Education Secretary Arne Duncan announced a a $60 million settlement with Sallie Mae on Tuesday for charging military service members excessive interest rates on their education loans.

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Student lending giant Sallie Mae has been ordered to pay nearly $100 million in restitution and penalties for "unfair and deceptive" practices related to student loans and for violating the legal rights of members of the military, according to legal action announced by the Justice Department and the Federal Deposit Insurance Corporation Tuesday.

Attorney General Eric Holder said in a lawsuit filed Tuesday the department claims Sallie Mae failed to provide service members with a 6 percent interest rate cap on their student loans, as promised to active duty members under Servicemembers Civil Relief Act. The department also proposed a settlement to the lawsuit, through which Sallie Mae would be required to pay $60 million to compensate an estimated 60,000 service members who were victim to the violation. 

[READ: Fake Sallie Mae Accounts Target Struggling Student Borrowers]

The settlement would also require Sallie Mae – which recently separated into two companies, Sallie Mae Bank and Navient Solutions – to request that all three credit bureaus delete any negative credit history associated with the violations.

"By requiring Sallie Mae to compensate its victims, we are sending a clear message to all lenders and servicers who would deprive our service members of the basic benefits and protections to which they are entitled: this type of conduct is more than just in appropriate; it is inexcusable. And it will not be tolerated," Holder said during a press conference Tuesday. 

In addition to failing to provide service members with the interest rate cap guaranteed to them under federal law, Holder said Sallie Mae in some cases obtained default judgments against service members who qualified under SCRA, and charged excessive rates to those who provided documents proving they were members of the military.

The FDIC also announced its own settlement with Sallie Mae Bank for "unfair and deceptive practices related to student loans," and for violations of SCRA. In a statement on the settlement, the FDIC said Sallie Mae violated federal law prohibiting such practices through inadequately disclosing the ways in which it allocates borrowers' payments across multiple loans in a way that maximizes late fees, and misrepresenting and inadequately disclosing how borrowers could avoid late fees.

Regarding SCRA, the FDIC said Sallie Mae was in violation for incorrectly telling service members they had to be deployed to receive their student loan benefits and failing to provide complete relief to borrowers after having been notified of their active duty status. 

The FDIC settlement stipulates Sallie Mae Bank, which originates private student loans, must pay $3.3 million in penalties. Navient, which services $300 billion in federal and private student loans on behalf of Sallie Mae, is responsible for paying another $3.3 million in penalties, $30 million in restitution to refund late fees and the $60 million to compensate servicemembers. 

[ALSO: Private Student Loan Borrowers Struggle With Lenders, Report Finds]

Sallie Mae Bank said it is confident that in complying with the terms of the settlements it will make the "appropriate adjustments for our customers regarding past issues with disclosure of late fee assessments and SCRA compliance." 

"We regret any inconvenience or hardship that our customers may have experienced," the company said in a release. "Initiatives are underway to prevent such errors from reoccurring and apply the clear regulatory guidance these orders now provide. Furthermore, we appreciate the service of the men and women who safeguard our freedom, and we are committed to meeting their needs in a manner that reflects their status and serves their best interest."

In a statement, Jack Remondi, president and chief executive officer of Navient, apologized to the servicemembers affected. 

"We offer our sincere apologies to the servicemen and servicewomen who were affected by our processing errors and thus did not receive the full benefits they deserve," Remondi said. "Over the past several years we have implemented changes in our procedures and training programs to prevent these mistakes from happening again. We also appreciate that the regulators agreed on consistent guidance that provides clarity and thereby enables us to offer SCRA benefits to even more service members back to as early as 2005 as well as going forward."

2012 report from the CFPB brought attention to complaints from service members who said they faced serious obstacles in accessing their student loan benefits, including the interest rate cap provided through SCRA. Additionally, several service members reported receiving unclear information about their loan repayment options. According to the report, some were told they could not receive their SCRA benefits unless their loans were placed into deferment or forbearance, which could actually increase the cost over time because interest would still accrue. 

"I have been concerned for some time about the way that military personnel are treated by their student loan servicers. The men and women serving this country should receive quality customer service and the legal protections afforded to them," said Holly Petraeus, assistant director of the Office of Servicemember Affairs at the Consumer Financial Protection Bureau, in a statement. "Instead, Sallie Mae gave service members the runaround and denied them the interest-rate reduction required by law. This behavior is unacceptable."

[MORE: Private Student Lenders Expand Refinance Options]

Sen. Tom Harkin, D-Iowa, who chairs the Senate's education committee, said he was "dismayed" to learn about the problems identified in the settlement.

"Our service members, who have been systematically denied the benefits to which they are entitled under the law and which were put in place to ensure they have an affordable education, deserve better," Harkin said in a release. "Today’s settlement only strengthens my resolve to put in place strong rules to ensure that all borrowers, especially those that sacrifice so much for this nation, are better protected from these abuses. While some of these bad actors might think that they are too big to fail, I am committed to ensuring that student loan borrowers are no longer too small to ignore." 

Updated on May 13, 2014: This story has been updated to reflect new information.