By Jonathan Stempel
(Reuters) - A federal judge has rejected Navient Corp's bid to dismiss a U.S. regulator's lawsuit accusing the nation's largest student loan servicer of systematically misleading millions of borrowers and driving up their loan repayment costs.
U.S. District Judge Robert Mariani refused to accept Navient's argument that the Consumer Financial Protection Bureau's lawsuit must be thrown out because the regulator itself was unconstitutional, and had not enacted rules declaring specific practices unfair, deceptive or abusive.
In his 60-page decision issued late Friday, the Scranton, Pennsylvania-based judge also found it premature to conclude that any alleged harms suffered by borrowers were avoidable.
"The bureau's complaint provides multiple specific examples of payment processing errors and then alleges that Navient failed to have policies and procedures in place to identify and prevent the same processing errors from occurring month after month," Mariani wrote.
Navient services over $300 billion of loans for more than 12 million borrowers, the CFPB has estimated.
Patricia Nash Christel, a spokeswoman, said the Wilmington, Delaware-based company was confident it would prevail, and that its work has helped borrowers repay loans, "resulting in higher enrollment in income-driven repayment and lower default rates."
The CFPB declined to comment. Navient was split off from Sallie Mae in 2014.
Created by the 2010 Dodd-Frank financial reform law, the CFPB has been a popular target for Republicans hoping to rein in financial industry regulation.
Now with the backing of the U.S. Department of Justice, many Republicans call its structure unconstitutional because director Richard Cordray, a Democrat, can be fired only for cause.
CFPB supporters say the structure protects the regulator's independence. The federal appeals court in Washington, D.C. is expected to decide the issue in the coming months.
In its complaint filed two days before Donald Trump became U.S. president, the CFPB accused Navient of "systematically and illegally failing borrowers" by providing bad information, processing payments incorrectly and failing to fix known problems.
It highlighted Navient's willingness to let an "immense" number of borrowers take short breaks from payments, leading to nearly $4 billion of extra and largely avoidable interest charges from January 2010 to March 2015.
Mariani, an appointee of President Barack Obama, said Navient failed to show constitutional problems with Cordray's alleged exercise of executive power, the limits on removing him, and Trump's inability to specifically veto CFPB funding in Congressional appropriations bills.
"Indeed," Mariani wrote, "there is good reason to believe that these characteristics function to increase the President's ability to supervise the bureau over other independent agencies."
The case is Consumer Financial Protection Bureau v Navient Corp, U.S. District Court, Middle District of Pennsylvania, No. 17-00101.
(Reporting by Jonathan Stempel in New York; Editing by Bernadette Baum and David Gregorio)