Massachusetts Attorney General Andrea Joy Campbell has reached a $2.5 million settlement with Earnest Operations LLC, a Delaware-based student loan company.
The settlement resolves allegations that the company’s lending practices violated consumer protection and fair lending laws, in part through the use of artificial intelligence (AI) models that could allegedly result in disparate harm to Black, Hispanic, and non-citizen applicants and borrowers in violation of Massachusetts law.
As part of the settlement, Earnest will pay $2.5 million to the state and implement extensive changes to its business practices. Those include taking steps to mitigate the risks of unfair lending and to ensure compliance with state and federal laws. The company also must regularly report on its compliance to the AG’s office.
“Earnest’s failure to comply with consumer protection and fair lending laws, including through its AI models, unfairly put historically marginalized student borrowers at risk of being denied loans or receiving unfavorable loan terms – impeding their chances of economic growth and opportunity,” said AG Campbell.
The AG’s office said that Earnest uses AI models, specifically algorithmic models, to make lending decisions, including decisions on applicants’ eligibility for loans, loan terms and pricing.
According to the AG, the company failed to take reasonable steps to mitigate the fair lending risks in underwriting practices associated with such models, including by failing to test the models for disparate impact and by training the models based on arbitrary, discretionary human decisions.
The AG also contended that the company engaged in other unfair and deceptive practices in violation of state and federal consumer protection and fair lending laws. “This included the company’s use of the [federal student loan] ‘Cohort Default Rate’ – an average rate of loan defaults associated with a specific educational institution – as a variable in its algorithmic model, which resulted in disparate impact in approval rates and loan terms for a certain product, with Black and Hispanic applicants more likely to be penalized than White applicants,” the AG said.
In addition, the AG said that “Earnest’s unfair and deceptive conduct included making arbitrary human-based loan assessments; using a ‘Knockout Rule’ to automatically deny applications based on immigration status; sending inaccurate adverse action notices that prevented applicants from understanding their own creditworthiness; and failing to implement policies and procedures to comply with fair lending laws and mitigate risks to consumers.”
Earnest denied the allegations made by the AG and also denied that it had violated state or federal law. It entered into the settlement to avoid the uncertainty of litigation and to resolve the investigation. Its agreement to the settlement was not an admission as to any of the assertions made by the AG.
Under the terms of the settlement, among other things, Earnest will implement a detailed corporate governance structure and develop written policies to ensure responsible and legally compliant use of AI. Earnest also will stop using the “Cohort Default Rate” variable and “Knockout Rule” based on immigration status.
The settlement was reached via an assurance of discontinuance filed in Suffolk County Superior Court.
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