NCHELP

1. NCHELP/EFC2011 STUDENT LOAN FINANCE AND LEGAL MEETINGInterContinental New York BarclayNew York, New York August 8, 2011 – August 9, 2011 Robert S. LavetPowers Pyles Sutter & Verville, P.C.

2. Participants in all sections of the student loan industry face litigation risks. Lenders Guarantors Collection Agencies Loan Servicers Litigation can be based on federal and/or state statutes. Adverse parties can be private litigants in individual or class action proceedings or regulators such as State Attorney General offices. Powers Pyles Sutter & Verville PC 2 Introduction

3. Presentation Goals Highlight and explain types of claims student loan industry participants face. Tips and advice for mitigating litigation risk or minimizing cost and exposure of litigation if sued. Powers Pyles Sutter & Verville PC 3 Introduction

4. Truth in Lending Act (“TILA”) Applies to creditors who regularly extend consumer credit. Amendment in 2008 extended statute of limitations and created special disclosure obligations for private educational loan lenders. Civil liability provisions in TILA – statutory damages, actual damages, and attorneys fee provision encourage lawsuits for even technical violations. Class actions permitted with damage cap. Powers Pyles Sutter & Verville PC 4 Claims Under Federal Statutes (TILA)

5. Truth in Lending Act (“TILA”) TILA provides for certain defense against liability. System error Correction of error before claim filed Examples of TILA lawsuits against student loan participants Blackhall v. Access Group (D. N.J. Sept. 22, 2010) Court dismissed claims that lender advertised false and misleading credit terms and failed to make required disclosures regarding how monthly payment calculated. TILA claims barred by then applicable one year statute of limitations. Prowley v. Hemar (S.D.N.Y. 2010) Dismissing TILA claim alleging failure to disclose balloon payment as outside statute of limitations. Powers Pyles Sutter & Verville PC 5 Claims Under Federal Statutes (TILA cont.)

6. Holding private student loan with 8.750% interest rate not usurious under NY law. Abel v. Keybank (N.D. Ohio 2004) In suit by former students of failed computer training school, class certification granted on Truth in Lending Act claim. Claim that bank failed to disclose specifics on LIBOR index used for interest rate. Blanco v. Keybank, et al. (N.D. Ohio 2005) TILA claim based on failure to adequately disclose LIBOR index used on notes survived motion to dismiss. Powers Pyles Sutter & Verville PC 6 Claims Under Federal Statutes(TILA cont.)

7. Equal Credit Opportunity Act (“ECOA”) and Regulation B Prohibits creditors from discriminating, among other things, on the basis of race, color, religion, national origin, sex, marital status, or age. Civil lawsuits can allege intentional discrimination or disparate impact. Class actions allowed with damage cap and successful plaintiffs can recover attorney’s fees. Powers Pyles Sutter & Verville PC 7 Claims Under Federal Statutes (ECOA)

8. Example of discriminatory impact claim under ECOA Putative class action against SLM Corporation (Sallie Mae) in Federal Court in Connecticut. (Rodriguez et al. v. Sallie Mae, filed 12/18/2007.) Alleges that Sallie Mae’s private loan pricing has discriminatory impact on minorities. Challenges use of school cohort default rates as factor in loan underwriting and pricing. Complaint alleges that Sallie Mae “steered” plaintiffs to substandard private loans on account of their race through relationships with colleges having high minority populations and discriminatory underwriting policies. Powers Pyles Sutter & Verville PC 8 Claims Under Federal Statutes(ECOA cont.)

9. Proposed class is broadly defined in complaint as all minority persons who have or have had a private loan underwritten by Sallie Mae or one of its agents. Complaint alleges violations of TILA, ECOA, and 42 U.S.C. §§ 1981-1982 (civil rights). Could lead to copycat suits against other lenders if successful. On June 24, 2009, the court denied Sallie Mae’s Motion for Summary Judgment without prejudice. The court granted defendants partial Motion to Dismiss the TILA counts on November 10, 2009. Third Amended Complaint filed November 25, 2009. Powers Pyles Sutter & Verville PC 9 Claims Under Federal Statutes(ECOA cont.)

10. Settlement approved by court in June, 2011 $500,000 cy pres. Conditional certification of class for settlement purposes. Up to $1.8 million attorney’s fees. Agreement not to use CDR in underwriting or originating private student loans prior to July 1, 2011. Agreement to certain disclosures on website. Fair Debt Collection Practices Act (“FDCPA”) Applies to debt collectors. Allows for actual damages, attorneys fees and statutory damages up to $1,000 without proof of injury. Class actions permitted with damage cap. Claims Under Federal Statutes (FDCPA) Powers Pyles Sutter & Verville PC 10

11. Examples of FDCPA claims involving student loan industry participants Claims against Collection Agencies Jackson v. Diversified Collection (D. Colorado 2010) Jury award based on improper contracts at plaintiff’s workplace. Statutory damages of $10 only since no actual damage and non-compliance infrequent and not intentional. Newman v. Ormond (11th Cir. 2010) Certain counts dismissed under bona fide error defense. Claim that collector threatened action not intended to be taken survived summary judgment. Powers Pyles Sutter & Verville PC 11 Claims Under Federal Statutes (FDCPA cont.)

12. Brookta v. GC Services (S.D. Tex. 2011) Case dismissed as moot where no actual damages and defendant offered maximum $1,000 statutory damages. Ellis v. General Revenue (D. Conn. 2011) Class certified in case alleging debt collector letters misrepresented federal rehabilitation program. Court finds each letter a new misrepresentation for purposes of one year statute of limitations. Powers Pyles Sutter & Verville PC 12 Claims Under Federal Statutes (FDCPA cont.)

13. FDCPA claims against loan servicers Loan servicers are not debt collectors under FDCPA where loan obtained for servicing prior to default. Edmond v. American Education Services (D.D.C. 2010). Brundergen v. Sallie Mae Servicing Corp. (5th Cir. 2004). Bridgeworth v. American Education Services Supervisor Dave (D. Del. 2010). Powers Pyles Sutter & Verville PC 13 Claims Under Federal Statutes (FDCPA cont.)

14. FDCPA claims against guaranty agencies Decisions mixed on whether guaranty agencies can avoid FDCPA liability under fiduciary exception. Gruen v. Ed Fund (N.D. Cal. 2009) – guarantee agency assigned loan to act as collection agency did not engage in collection agency “incidental” to original guarantor’s fiduciary duty to Department of Education. Rowe v. ECMC (9th Cir. 2009) – where guarantor’s sole function was post default assignment to collect, collector function central rather than incidental to fiduciary duty and thus is subjected to FDCPA claim or remand district court granted summary judgment to ECMC. Powers Pyles Sutter & Verville PC 14 Claims Under Federal Statutes (FDCPA cont.)

15. Murungi v. Tex. Guaranteed (5th Cir. 2010) – finding guarantor not a debt collector since efforts to collect debt incidental to bona fide fiduciary obligation guarantor had to federal government. Note that in Q&A to recent federal register notice to guaranty agencies – Department of Education said that GA’s who collect defaulted loans for other GA’s are subject to FDCPA. Powers Pyles Sutter & Verville PC 15 Claims Under Federal Statutes (FDCPA cont.)

16. Federal False Claims Act (“FCA”) Allows for Qui Tam (whistleblower) claims against entities who submit false claims for payment from government. Treble damages and bounty provisions. Government can elect to intervene and control case or decline in which whistleblower controls case. Lenders, guarantors and servicers of FFEL loans receive payments from Department of Education. Powers Pyles Sutter & Verville PC 16 Claims Under Federal Statutes (FCA)

17. Examples of FCA claims in student loan industry. U.S. ex. rel. Oberg v. Nelnet et al. (E.D. Va. 2009) FCA claim by former Department of Education employee alleging false statements by numerous student lenders in billing special allowance for loans financed by tax-exempt bonds. Government declined intervention. Relator’s claims survived motion to dismiss even though agency had rejected his claims of fraud. Slip. Op. C.A. No. 01:07-CV-960 (December 1, 2009). Powers Pyles Sutter & Verville PC 17 Claims Under Federal Statutes (FCA cont.)

18. Settlement prior to summary judgment ruling. State agency defendants dismissed brought by Relators as State agencies not subject to FCA claims, but appeal pending. Virgil v. Nelnet (8th Cir. 2011) FCA claim alleging false statements with special allowance billings on theory that underlying loans obtained in violation of prohibited inducement laws dismissed for failure to state claim. Inducement regulations conditions of participation not conditions of payment. Powers Pyles Sutter & Verville PC 18 Claims Under Federal Statutes (FCA cont.)

19. Other FCA claims involving student loans. Falsified due diligence. Alleged improper practices with respect to forbearances. Considerations in Defending False Claims Act cases. Consider statutory defenses. Keep communication lines with DOJ even if no intervention by government. Coercive effect of treble damages provision often leads to settlements if complaint survives motion to dismiss. Powers Pyles Sutter & Verville PC 19 Claims Under Federal Statutes (FCA cont.)

20. Telephone Consumer Protection Act (“TCPA”) Arthur v. Sallie Mae, et al. (W.D. Wash 2010). Najafi v. SLM Corp., et al. (S.D. Cal.2010). Combined settlement in both cases. Complaint alleged Sallie Mae violated TCPA by placing calls to cellular phones by auto dialer system without express consent of name plaintiffs and putative class members. Conditional certification of class for settlement purposes only. Settlement funds collectively of $19.5 million. Powers Pyles Sutter & Verville PC 20 Claims Under Federal Statutes (TCPA)

21. Fair Credit Reporting Act (“FCRA”) Claims based on reporting to credit bureaus. Servicers, lenders, collection agencies and guarantors have been sued under FCRA for reporting regarding delinquent and defaulted borrowers to credit bureaus. Claims under FCRA against Lenders or servicers for allegedly reporting inaccurate information are routinely dismissed based on lack of private right of action. Powers Pyles Sutter & Verville PC 21 Claims Under Federal Statutes (FCRA)

22. Pirouzian v. SLM (S.D. Cal. 2005) Ashton v. Sallie Mae (N.D. Tex 2010). Edmond v. American Educational Services (D.D.C. 2010). Gibbs v. SLM Corp. (D. Mass 2004). Furnishers can be sued under Section 10815-2(b) of FCRA if the furnisher receives notice of customer dispute from credit reporting agency and fails to adequately investigate. Forester v. PHEAA (C.D. Cal 2009). Powers Pyles Sutter & Verville PC 22 Claims Under Federal Statutes (FCRA cont.)

23. FCRA claims against guarantors that are state agencies, may be subject to 11th Amendment defense. Peasless v. Isac (N.D. Ill. 2007) Common law claims often appended to FCRA claims. Intentional Infliction of Emotional Distress. State UDAP claims. Powers Pyles Sutter & Verville PC 23 Claims Under Federal Statutes (FCRA cont.)

24. Preemption of certain state law claims under FCRA. Defamation preempted unless plaintiff alleges false information furnished with malice or willful intent to injure the customer. State law claims alleging breach of duty by furnisher of credit information generally pre-empted under Section 1681t – (b)(1)(F) of FCRA. See Pirouvzian v. SLM Corp., 396 F. Supp. 2d 1124 (S.D. Cal. 2005). Powers Pyles Sutter & Verville PC 24 Claims Under Federal Statutes (FCRA cont.)

25. State Unfair and Deceptive Trade Laws (“UDAP”) California and New York and states with broad UDAP laws California B&P Code § 7200. New York § 349 General Business Law. Examples of common law claims Suits alleging failure by lenders to include FTC holder rule notice is deceptive practice. FTC holder rule applies in certain contexts and allows consumer to assert claims they have against seller of services as defense to repayment of loan. Powers Pyles Sutter & Verville PC 25 State Law Claims

26. Examples of FTC Holder Claims Kilgore, et al. v. Keybank USA, et. al (N.D. Cal. April 12, 2010) Dismissed claims by students of failed helicopter training school (Silver State) against Keybank which made private loans to students. Complaint alleged Keybank engaged in fraud, violated FTC Holder rule, and aided and abetted to the school’s violation of the FTC Holder rule by not including FTC Holder rule notice in the promissory note. Powers Pyles Sutter & Verville PC 26 State Law Claims (cont.)

27. Court dismissed direct claims under FTC Holder rule, finding that under that rule the seller of services not the lender (the school) commits an unfair business practice by accepting loan proceeds made pursuant to an agreement that does not include the holder notice. Court found that plaintiffs stated claim for aiding and abetting against Keybank but found that plaintiff’s claims were preempted by the National Bank Act and that Keybank could not be sued under state law for failing to comply with a federal regulation that did not itself require Keybank’s compliance. Powers Pyles Sutter & Verville PC 27 State Law Claims (cont.)

28. Fargo v. Career Education Corp., et al. (Cal. 2011). Court allows plaintiff leave to amend complaint against Sallie Mae to allege that as holder of credit contract claims Sallie Mae subject to claims asserted against school. Smith v. Computer Training.Com and Sallie Mae (E.D. Mich 2011). Motion to compel arbitration granted in 11 count complaint based on FTC Holder Rule. No indication that claims under FTC Holder Rule are nonarbitrable. Powers Pyles Sutter & Verville PC 28 State Law Claims (cont.)

29. Other State Law Claims Botoni v. Sallie Mae, et al. (N.D. Cal. 2011) - claim that 25% collection fee imposed on defaulted private loan was unfair and deceptive practice under California law. Some claims survived Motion to Dismiss. Chae v. SLM (9th Cir. 2010), dismissing claims alleging that use of simple daily interest method on FFEL loans violated California law. Powers Pyles Sutter & Verville PC 29 State Law Claims (cont.)

30. Ubaldi v. SLM (N.D. Cal. 2011) Putative class action challenging 5% late fee provision in private student loan agreements as unlawful liquidated damages penalty. Claims late fee compensates SLM in excess of true damages. Asserts claims under California B&P Code. Raises preemption issues. State Law Claims (cont.) Powers Pyles Sutter & Verville PC 30

31. State AG offices actively target industries State AGs may conduct multi-state investigations Coordination through National Association of Attorney Generals (“NAAG”). Examples 10 state combined investigation of for-profit schools. Approximately 13 states piled on Cuomo investigation of student lenders in 2007. Powers Pyles Sutter & Verville PC 31 State Attorney General Claims

32. State AGs seek consent decrees or assurances of voluntary compliance Typically seek costs of investigation. Customer refunds. Conduct agreements. State AGs rarely litigate Consider impact on civil litigation. State AGs have power of the press, which encourages settlement. Will publicly release e-mails to encourage settlement. Powers Pyles Sutter & Verville PC 32 State Attorney General Claims (cont.)

33. Focus on Customer Complaints Provide process for receiving complaints. Consider use of anonymous hotlines. Investigate and analyze all complaints-pay attention to patterns. Respond to all complaints. Take appropriate action. Powers Pyles Sutter & Verville PC 33 Tips for Reducing Litigation Risks

34. Get Control of Your Documents Implement an e-mail retention program. Train executives on proper use of e-mails and risk in litigation. Focus on auto-delete policies and treatment of back-up tapes. Regularly conduct test review of emails on selected key executives. Powers Pyles Sutter & Verville PC 34 Tips for Reducing Litigation Risks (cont.)

35. Use Compliance Program to Assess Litigation Risks Catalog the laws that govern your business and lead to legal claims. Follow industry trends and legal proceedings in industry. Update compliance program to deal with new and emerging risks. Identify the 20% of legal issues that generate 80% of your legal costs. Powers Pyles Sutter & Verville PC 35 Tips for Reducing Litigation Risks (cont.)

36. Consider arbitration clauses in customer agreement Arbitration can reduce legal risk Lower legal costs. Less intrusive discovery. Confidentiality of proceedings. Quicker decisions. Supreme Court has issues series of rulings enhancing enforced numbers of arbitration clauses in consumer contracts. Recent decision by Supreme Court in AT&T Mobility case prohibits states from declaring class action waivers unenforceable. Powers Pyles Sutter & Verville PC 36 Tips for Reducing Litigation Risks (cont.)

37. AT&T case should significantly limit consumer class actions. Possible CFPB role in use of arbitration clauses. If you use arbitration clause, make sure it is not one-sided. Right to reject. Address payment of fees. Don’t limit remedies. Powers Pyles Sutter & Verville PC 37 Tips for Reducing Litigation Risks (cont.)

38. Federal rules relating to discovery require company to commit resources at start of case to get handle on facts and documents, including electronic documents. Devise a discovery strategy for electronic documents at start of case to get handle on facts and documents. Be prepared for meet and confer conference with proposals for E-discovery. Avoid electronic discovery missteps and spoilation claims, e.g., Morgan Stanley. Legal Holds. Suspending auto-delete of electronic documents. Treatment of back-up tapes. Companies must understand where their documents are stored; how backup tapes are preserved and how to identify and preserve relevant documents to contain exposure and cost of litigation. Powers Pyles Sutter & Verville PC 38 Tips for Reducing Costs and Exposure in Litigation

39. Once you have been sued, identify what is at stake for the company and the other parties. Determine whether case has high risk of potential damage in public relations area even if case is defensible. Recognize that some cases have to be litigated even if costs of litigating exceeds exposure in that case. Don’t litigate in a vacuum: involve public relations group and if public company, consider disclosure and reserve issues. Clearly identify role of in-house attorney; business lead and outside attorney; don’t turn the case over carte blanche to outside attorney. Powers Pyles Sutter & Verville PC 39 Tips for Reducing Costs and Exposure in Litigation (cont.)

40. 40 Robert S. Lavet