Improvident Student Lending

The idea that lending without regard to ability to repay should be illegal is not particularly new, but it gained purchase in recent years with the rapid growth of high-cost mortgage loans. In the late 1990s, law enforcement and private litigants began attacking predatory mortgage lenders on the grounds they were making loans that borrowers could not afford. Both before and after the financial crisis of 2008, state and federal legislators imposed reforms on the mortgage market that provided relief to borrowers whose lenders failed to determine whether they had sufficient income to afford their monthly mortgage payments. This Article seeks to address two gaps in the literature on ability to repay.

The first is the lack of research on the application of the ability-to repay standard to nonmortgage credit products. Second, the Article identifies a trend toward an increased focus on ex post loan performance as opposed to ex ante risk assessments to determine whether a lender considered a borrower’s ability to repay. The example of litigation against for-profit colleges’ student loan activities illustrates these points.