According to the Biden government’s policy guidelines, federal regulators have made it clear that equitable and responsible lending is a enforcement priority – and that the directive extends to lenders lending to students (also referred to as student loans).
Educational loans are credit extensions granted to students or parents to fund undergraduate, postgraduate and other forms of postgraduate education. Federally funded and private student loans can be offered by banks, nonprofits, non-banks, credit unions, government agencies and higher education institutions, including both for-profit and non-profit schools. Lenders are expressly prohibited from discriminating against student loan transactions under the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in any aspect of any type of credit transaction.
Student lending highlights important national issues, as balances and bankruptcies have risen, and the current administration has shown that it is open to even writing off part of the debt. Given the new focus on student lending, focusing on equitable lending for education and student lending 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) revealed in its Consumer Compliance Supervisory Highlights report that it had referred a fair lending matter to the US Department of Justice regarding a pattern or practice of discriminating against student loans. The institution had a policy of using the Default Qualification Rate (CDR) – a measure released by the US Department of Education that shows the percentage of borrowers in a school who default on certain loans – as an eligibility threshold to determine which students could qualify. apply for loan consolidation and refinancing loans for private student loans. The FDIC determined that the use of the CDR resulted in the “disproportionate exclusion” of students attending Historical Black Colleges and Universities (HBCU) from applying for credit. Because HBCU alumni were disproportionately black, the FDIC concluded that the foundation’s policy on the use of CDR had a disproportionate impact on race.
The FDIC acknowledged that “the use of the CDR to determine eligibility requirements for the school was a neutral policy”, meaning that the policy was applied equally to all students regardless of race or nationality. The FDIC, however, has identified a pattern of discrimination in the light of a dissimilar theory of liability – a theory used to show discrimination when a lender applies a person-neutral policy to all credit applicants alike, but this policy causes disproportionately adverse effects on certain persons on a prohibited basis. The question therefore arises as to whether there is sufficient non-racial business justification for using the CDR to assess eligibility for student loans. Breed, of course, can not be used as a determinant of credit, even in cases where performance may be predictive.
Financial institutions involved in student loans should keep in mind that fair lending is an area of potential new control and risk. Now is the time for compliance departments and legal departments to review and update, as required, written policies and business practices, conduct an appropriate lending risk assessment, and ensure that adequate internal controls are in place to mitigate these risks. .
Copyright 2022 K & L GatesNational Law Review, Volume XII, No. 108