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John L. Culhane, Jr., Partner Consumer Financial Services Group Higher Education Group 215.864.8535 culhane@ballardspahr

Litigation Developments – Private Student Loans and the Disparate Impact Theory under the ECOA EFC /NCHER Student Loan Legal Meeting New York, New York August 6, 2013 . John L. Culhane, Jr., Partner Consumer Financial Services Group Higher Education Group 215.864.8535

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John L. Culhane, Jr., Partner Consumer Financial Services Group Higher Education Group 215.864.8535 culhane@ballardspahr

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  1. Litigation Developments – Private Student Loans and the Disparate Impact Theory under the ECOAEFC/NCHER Student Loan Legal MeetingNew York, New YorkAugust 6, 2013 John L. Culhane, Jr., Partner Consumer Financial Services Group Higher Education Group 215.864.8535 culhane@ballardspahr.com

  2. Private Student Loans – The Focus • School eligibility determinations • Borrower eligibility determinations • Pricing tiers using factors that have a disparate impact • Discretion with borrower benefits and loss mitigation policies • E.g., CFPB Private Student Loan Report (use of federal cohort default rate (“CDR”), graduation rate, or any other school-specific criterion); CFPB First Annual Fair Lending Report (use of CDR); major bank lenders have since undergone exams but no further public actions

  3. Disparate Impact – Statutory Text Adapted from Peter Cubita and Michelle Hartmann, The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words That Actually Are There, 61 The Business Lawyer 831 (2006).

  4. Disparate Impact – ECOA – Deference? • Interpretation of ECOA text or legislative history? • Footnote 2 to Section 1002.6(a) of Regulation B (the legislative history indicates that Congress intended an “effects text” concept”) • Comment 1002.6-2 of the Official Staff Commentary (“Congressional intent ...is documented in [Senate Report No. 94-589] and in [House Report No. 94-210]”) • The 1994 Interagency Policy Statement, 59 Fed. Reg. 18266 (Apr. 15, 1994) (adopted by HUD, DOJ, OCC, OTS, FRB, FDIC, FHFB, FTC, NCUA and OFHEO)

  5. Disparate Impact – FHA – Deference? • Interpretation of FHA text or legislative history? • HUD rulemaking proceeding ostensibly to formalize its “long-standing interpretation” • Proposed rule issued with 60-day comment period, 76 Fed. Reg. 70921-27 (Nov. 16, 2011) • Final rule, issued 30 days after end of comment period, adopted disparate impact standard, with some minor changes, 78 Fed. Reg. 11460-82 (Feb. 15, 2012) • Final rule, at 24 C.F.R. §§ 100.5 et seq., took effect on March 18, 2013

  6. Disparate Impact – The CFPB • Bulletin No. 2012-04, issued April 18, 2012 (“the legal doctrine of disparate impact remains applicable”) • First Annual Fair Lending Report, released December of 2012 (citations to CFPB Bulletin No. 2012-04 and the Private Student Loan Report’s criticism of CDR) • Bulletin No. 2013-02, issued March 21, 2013 (application of doctrine to dealer rate participations) • ECOA Baseline Review Modules, released July 2013 (numerous references to disparate impact – but oddly, no separate module for private student loans)

  7. Disparate Impact – Mount Holly Case • Cert granted, on June 17, 2013, on question 1, which was “Are disparate impact claims cognizable under the Fair Housing Act” (Case No. 11-1507) • Underlying claim is that redevelopment plan has disparate impact on minorities (township is defending on the theory that there is no textual basis for a disparate impact claim) • Focuses on FHA disparate impact but clear ECOA implications (similarities in text and legislative histories) • Briefing deadlines extended amidst reports of ongoing settlement negotiations (recalling Magner v. Gallagher)

  8. Disparate Impact – AIA Case • AIA case may turn out to be the one that results in a decision on disparate impact • Filed against HUD, on June 26, 2013, in federal district court in Washington, D.C. (Case No. 1:13-cv-00966-RJL) • Brought by the American Insurance Association and the National Association of Mutual Insurance Companies on behalf of their members selling homeowner’s insurance • Complaint alleges that HUD rule is invalid for two reasons: (1) FHA only prohibits intentional discrimination and (2) rule conflicts with McCarran-Ferguson Act

  9. Disparate Impact – AIA Case (cont.) • Suit asks court to declare that the HUD rule conflicts with the FHA and then to issue an order vacating the rule and enjoining HUD from enforcing it • Unlike Mt. Holly, unlikely to be settled, since any settlement would probably require HUD to recant and agree that its rule does not apply to insurance (contrary to preamble to proposed rule) • Some risk of a decision on McCarran Ferguson Act (associations argued that insurers use legitimate factors, are required to estimate risk accurately, and cannot collect data on – or even consider – race or ethnicity)

  10. Questions / Resources If you have questions, please contact me: Visit our ABA award-winning blog at www.CFPBMonitor.com. Subscribe to our e-alerts at www.ballardspahr.com (click “subscribe”). DMEAST #17378663 v1

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