Emerging Fair Lending Risk: Student Loans | K&L Gates LLP

In line with policy guidelines from the Biden administration, federal regulators have made it clear that fair and responsible lending is an enforcement priority — and the directive extends to lenders providing student loans (also known as student loans). studies).

Student loans are extensions of credit given to students or parents to finance undergraduate, graduate, and other forms of post-secondary education. Federally funded and private student loans can be offered by banks, non-profit organizations, non-bank organizations, credit unions, state-affiliated organizations, and institutions of higher education, including including for-profit and non-profit schools. Lenders are expressly prohibited from discriminating in student loan transactions under the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in any aspect of any type of transaction. credit.

Student loans highlight significant national issues, as outstanding balances and defaults have increased, and the current administration has shown itself willing to consider even some debt cancellation. Given the new emphasis on student loans, attention to fair lending for student loans is a natural next step. In fact, regulators have recently signaled that fair lending in the area of ​​student loans could be a focal point for consideration. In March 2022, the Federal Deposit Insurance Corporation (FDIC) disclosed in its Consumer Compliance Monitoring Highlights Report that it had referred a fair lending matter to the U.S. Department of Justice involving a pattern or practice of discrimination in the underwriting of student loans. The institution in question had a policy of using the Cohort Default Rate (CDR) – a measure published by the US Department of Education that shows the percentage of a school’s borrowers who default on certain loans – as a threshold for eligibility to determine which students may apply. for private student loan debt consolidation and loan refinancing. The FDIC determined that the use of the CDR resulted in the “disproportionate exclusion” of students who attended historically black colleges and universities (HBCUs) from applying for the credit. Because HBCU graduates were disproportionately black, the FDIC concluded that the institution’s policy of using CDR had a disproportionate impact on the basis of race.

The FDIC has acknowledged that “using the CDR to determine school-specific eligibility requirements is policy neutral,” meaning the policy is applied equally to all students, regardless of race. or their ethnic origin. The FDIC, however, has identified a pattern of discrimination through the lens of a disparate impact liability theory – a theory that is used to show discrimination when a lender applies a seemingly neutral policy to all credit applicants. , but that this policy has a disproportionate negative effect. effect on certain persons on a prohibited basis. The question therefore arises as to whether there is sufficient non-racial business justification for the use of CDR in assessing eligibility for student loans. Race, of course, cannot be used as a qualifying factor in making credit decisions, even in circumstances where it might be predictive of performance.

Financial institutions involved in student loans should note that fair lending is an area likely to come under new scrutiny and risk. Now is the time for compliance and legal departments to review and update, as necessary, written policies and business practices, perform a fair and appropriate assessment of lending risk, and ensure that adequate internal controls are in place to mitigate these risks.

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