Massachusetts settles with Earnest over lending practices for $2.5 million
Massachusetts Attorney General Andrea Joy Campbell announced a $2.5 million settlement with Earnest Operations LLC over alleged consumer protection and fair lending violations tied in part to AI-driven lending models.
Massachusetts Attorney General Andrea Joy Campbell said Earnest Operations LLC will pay $2.5 million and change its business practices to resolve allegations that its student loan lending process violated consumer protection and fair lending laws.
The state said Earnest’s use of AI and algorithmic models may have harmed Black, Hispanic and non-citizen applicants and borrowers. The agreement also requires Earnest to report compliance to the attorney general’s office, adding oversight to a lending system the state said affected loan eligibility, pricing and terms.
According to the attorney general’s office, Earnest used AI or algorithmic models in lending decisions and did not adequately test those models for disparate impact. The state also alleged the company relied on arbitrary human decisions in model training, used the federal student-loan Cohort Default Rate in a way that caused disparate impact for one product, and used a “Knockout Rule” to automatically deny applications based on immigration status.
The office said the company also sent inaccurate adverse-action notices and failed to put in place policies and procedures needed to comply with fair-lending laws. The attorney general said Black and Hispanic applicants were more likely than White applicants to be penalized for one product.
The settlement was reached through an assurance of discontinuance filed in Suffolk County Superior Court, according to the source report. Earnest is described as a Delaware-based student loan company.
Under the agreement, Earnest will implement business-practice changes, create a corporate governance structure and develop written policies for responsible and legally compliant AI use. The company will also stop using the Cohort Default Rate variable and stop using the immigration-status-based Knockout Rule, the source report said.
Earnest denied the allegations and said it entered the settlement to avoid litigation uncertainty and without admitting wrongdoing, according to the source report.
The settlement requires compliance reporting and leaves the attorney general’s office overseeing Earnest’s lending practices under the filed agreement.
Sources
Editorial note: This article was prepared with AI assistance and includes source attribution for reader review.
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