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

2. 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. 3 Disparate Impact – Statutory Text StatuteTitle VIIECOAFair Housing Act Disparate Treatment Prohibition It shall be an unlawful employment practice for an employer … to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual …. because of such individual’s race, color, religion, sex, or national origin (§ 703(a)(1)) It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction … on the basis of race, color, religion, national origin, sex or marital status, or age (§ 701(a)(1)) [I]t shall be unlawful … [t]o refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin. (§ 804(a)) Disparate Impact Prohibition to limit, segregate, or classify his employees … in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s race, color, religion, sex, or national origin (§ 703(a)(2)) None 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. 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. 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. 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. 7 Disparate Impact – Mount Holly Case C ert granted, on June 17, 2013, on question 1, which was “Are disparate impact claims cognizable under the Fair Housing Act” (Case No. 1 1-1507) 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. 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. 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. 10 John L. Culhane, Jr. Partner Consumer Financial Services Group Higher Education Group 215.864.8535 culhane@ballardspahr.com 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