| 来源类型 | Report |
| 规范类型 | 报告 |
| Pricing without discrimination: Alternative student loan pricing, income-share agreements, and the Equal Credit Opportunity Act | |
| Dowse B. (Brad) Rustin IV; Neil E. Grayson; Kiersty M. DeGroote | |
| 发表日期 | 2017-02-09 |
| 出版年 | 2017 |
| 语种 | 英语 |
| 摘要 | Key Points With value for money calculations that account for nontraditional lending factors, Alternative Finance (AltFinance) and income-share agreements (ISAs) provide transparency to students seeking to finance higher education. However, AltFinance’s and ISA’s pricing of loans and student investments based on predictors of a student’s future income invites significant risk of Equal Credit Opportunity Act (ECOA) claims. Because of the disparate impact of these predictors on protected classes of people, it is important for AltFinance lenders and ISA investors to maintain accurate data to support the defense to an ECOA claim. Read the full PDF. Executive Summary New private financing options for higher education are becoming more popular every year. Products that take into account nontraditional lending factors, such as Alternative Finance (AltFinance), or that attempt to predict a student’s future income with income-share agreements (ISAs), provide an additional layer of transparency to students and their families with value for money calculations. However, with AltFinance, which prices loans based on a student’s perceived likelihood of repayment, and ISAs, in which an investor obtains repayment based on a student’s future income, the risk of Equal Credit Opportunity Act (ECOA) claims is significant. Based on prior research, some of the best graduation rates and future income predictors may disproportionately affect—or have a disparate impact on—protected classes of people. As AltFinance lenders and ISA investors consider these issues, maintaining accurate data to support the business necessity and manifest relationship defense to an ECOA claim is important. Introduction With the increasing costs of postsecondary education and resulting growth in student debt nationwide, students are seeking new and innovative ways to fund their education, and lenders and investors are seeking new and innovative ways to more accurately price student loans and other forms of student financing. Recently, lenders and investors have developed several innovative student finance products that diverge significantly from traditional student lending. Rather than provide a fixed amount of funding at a predetermined rate based on traditional considerations of credit history and creditworthiness, these alternative financing sources look to factors that may be better predictors of students’ success and, in turn, their likelihood and ability to repay.1 Several alternative finance (AltFinance) companies have developed new methods for evaluating a borrower’s ability and likelihood of repaying a loan. While still making loans, these companies, including Common Bond, SoFi, and Zero Bound, use more complex scoring algorithms for credit decisions and purport to reduce the fees and penalties associated with certain traditional loans. Going a step further, companies such as Upstart take into account alternative underwriting factors, such as school of attendance, grades, major, and job history. The risk of nonrepayment is still on the student in the AltFinance model, but the pricing of the loan is, in theory, more indicative of the risk of default and likelihood of repayment by the student. Taking the AltFinance concept a step further, a number of companies now offer income-share agreements (ISAs). ISAs are innovative financial instruments for privately funding education. Depending on their structure, ISAs may act as a hybrid of an equity investment agreement and a purchase-sale agreement, creating an opportunity for individuals to raise capital for themselves in the form of “equity” rather than debt. Once students graduate, they pay a percentage of their income for an established period of time. This repayment obligation percentage varies somewhat, and the amount that the investor is willing to invest varies. Unlike a loan in which the student has an absolute obligation to repay the principal plus an interest rate, the ISA ties the interests of the investor to the student. The payments due to the investor vary as the student’s future income rises or falls. Therefore, it is in the investor’s best interest to accurately gauge both the likelihood of the student completing the degree and course of study and the student’s future earnings potential. See Table 1 for a comparison of the features of common public- and private-financing options students can use to fund their education. Inherent in the AltFinance and ISA models is the need for the investor to predict the student’s future success, which raises questions regarding the application of the Equal Credit Opportunity Act (ECOA), particularly those provisions relating to the disparate treatment of protected classes of individuals. AltFinance lenders and ISA investors are presented with a unique challenge. For both, these nontraditional underwriting factors are untested in legal cases. The challenges to ISA investors are twofold. In addition to the underwriting criteria challenges, it is unclear how courts will treat ISAs and whether ISAs will be treated as debt or equity for purposes of a variety of statutes, including the ECOA.2 Prior research has examined many factors that are highly predictive of graduation and future earnings. To the extent the ECOA applies, AltFinance lenders and ISA investors must exercise caution in deploying these selection and pricing criteria so as to avoid discrimination against groups the ECOA protects. As this paper explains, some of the best graduation and future income predictors may disproportionately affect protected classes of people. This report first examines the ECOA’s analytical framework. Next, it analyzes the factors used to determine the price and availability of credit and the influence the ECOA exerts on traditional lenders. Third, it details the factors that determine loan repayments and the ECOA risks associated with traditional student lending. In this analysis, the paper examines the best predictors of future earnings and ECOA risks presented by consideration of those factors. From this point, the paper will examine the defenses available to lenders, addressing the likelihood that ISA investors will need to invoke the business necessity and manifest relationship doctrines to defend underwriting decisions. The report concludes by addressing the unique interaction of the ISA model with the ECOA. Read the full report. Notes |
| 主题 | Higher Education |
| 标签 | Higher education ; income share agreements ; Student debt ; Student loans |
| URL | https://www.aei.org/research-products/report/pricing-without-discrimination-alternative-student-loan-pricing-income-share-agreements-and-the-equal-credit-opportunity-act/ |
| 来源智库 | American Enterprise Institute (United States) |
| 资源类型 | 智库出版物 |
| 条目标识符 | http://119.78.100.153/handle/2XGU8XDN/206355 |
| 推荐引用方式 GB/T 7714 | Dowse B. ,Neil E. Grayson,Kiersty M. DeGroote. Pricing without discrimination: Alternative student loan pricing, income-share agreements, and the Equal Credit Opportunity Act. 2017. |
| 条目包含的文件 | ||||||
| 文件名称/大小 | 资源类型 | 版本类型 | 开放类型 | 使用许可 | ||
| Pricing-Without-Disc（1139KB） | 智库出版物 | 限制开放 | CC BY-NC-SA | 浏览 | ||
除非特别说明，本系统中所有内容都受版权保护，并保留所有权利。
