MA Settles With Student Loan Company Over Allegations of Unlawful AI Model Use

The Massachusetts Attorney General recently announced a $2.5 million settlement with a student loan company over allegations that the company, among other things, engaged in unfair and deceptive practices by using an insufficiently-tested algorithmic artificial intelligence (AI) model to make lending decisions.  The AG also settled allegations that the company violated ECOA by issuing inaccurate and non-specific adverse action notices (generated from a limited drop-down list of decline reasons), and by using immigration status to automatically deny loan applications (e.g., automatically denying those without a green card).

The AG alleged that the company deployed AI models without taking reasonable measures to account for fair lending risks, such as by testing the AI models for disparate impact, among other things.  In one model, the company used the Cohort Default Rate (a rate produced by the U.S. Department of Education related to average defaults associated with each higher education institution) in underwriting, which was an alleged disparate impact ECOA violation.  Also, the company allegedly engaged in unfair or deceptive practices when the company’s underwriters used discretion to manually adjust risk and override the models, by changing approval/denial and pricing decisions, without a written exception policy.

In addition to the monetary penalty, the company must meet certain compliance requirements, including that it must:

• Develop, implement, and maintain corporate governance for use of AI models;
• Develop, implement, and maintain written corporate policies to govern the responsible design, development, and deployment of AI models, and to assess and monitor, among other things, judgmental underwriting and adverse action notices;
• Stop use of the Cohort Default Rate in AI models; and
• Submit to the AG annual reports for three years after the initial report demonstrating compliance.

The company denies the allegations and further denies any violation of Massachusetts or federal law.