The opinion of the court was delivered by: JOHN R. PADOVA
This case presents an important question of first impression: Whether a "lender of last resort" under section 428(j) of the Higher Education Act of 1965, as amended (the "Act"), 20 U.S.C.A. § 1078(j)(West Supp. 1993), may base its federal student loan lending decisions upon information disclosed in an applicant's credit history? The parties agree that this question is entirely legal in nature, and plaintiffs have accordingly filed a motion for partial summary judgment on this issue under Federal Rule of Civil Procedure 56(c). For the following reasons, I conclude that a "lender of last resort" under the Act may, in its discretion, base its federal student loan lending decisions upon information disclosed in an applicant's credit history, provided that consideration is also given to the applicant's past attempts to repay other debts (if any) and any financial or personal hardship the applicant may have experienced. I will therefore deny plaintiffs' motion.
Plaintiffs Philadelphia Training Center Corporation ("PTC-Corporation") and PTC Career Institute of Georgia, Inc. ("PTC-Georgia") (collectively, "PTC") operate training centers in the State of Georgia for students interested in a variety of careers, including nursing assistant and secretarial specialist. Many of PTC's students (a majority of whom, PTC asserts, are impoverished, inner-city minorities) finance their training at PTC-Georgia through loans made available under the Robert T. Stafford Federal Student Loan Program ("Stafford Loan Program"), 20 U.S.C.A. §§ 1071 et seq. (West 1990 and West Supp. 1993), and PTC has executed an agreement with the Secretary of the U.S. Department of Education making it eligible to participate in this program.
Among other things, the Stafford Loan Program provides for guarantees of student loans made under that program (currently known as Federal Stafford Loans ("FSLs")). 20 U.S.C.A. §§ 1071(a)(1)(D), 1078(b). Until June 30, 1992, FSLs made to PTC-Georgia students were guaranteed by the Pennsylvania Higher Education Assistance Agency ("PHEAA"), a state "guaranty agency" under the Act. See 20 U.S.C.A. §§ 1085(j), 1078(b). As of that date, however, PHEAA no longer guaranteed the FSLs of PTC-Georgia students. PTC subsequently looked to defendants State of Georgia, Stephen Dougherty, Georgia Student Finance Commission, Georgia Higher Education Assistance Corporation ("GHEAC")
and Kitty McDonald (collectively, "Georgia")
to guarantee its students' FSLs. Georgia refused, however, to admit PTC into its Guaranteed Student Loan Program ("GSL Program").
PTC-Corporation and its many subsidiaries, including PTC-Georgia,
had filed for bankruptcy protection and reorganization in this Court in January 1990, which matter was referred to the Bankruptcy Court for the Eastern District of Pennsylvania ("Bankruptcy Court").
When Georgia refused to admit PTC into its GSL Program, PTC initiated an adversary proceeding in the Bankruptcy Court to compel its admittance to the program under theories of, inter alia, violation of the Bankruptcy Code, 11 U.S.C.A. §§ 101 et seq. (West 1993), and 42 U.S.C.A. § 1983 (West 1981 & West Supp. 1993). The reference of that proceeding was withdrawn upon the unopposed motion of Georgia, and the case proceeded in this Court under the above civil action number through a series of pretrial motions and entry of a Consent Order, pursuant to which Georgia agreed to begin processing FSL applications submitted by PTC-Georgia students as a "lender of last resort" under section 428(j) of the Act, 20 U.S.C.A. § 1078(j).
After entry of the Consent Order, the parties informed the Court that they had entered into a settlement agreement that would supersede the Consent Order and end further litigation. Pursuant to this settlement agreement, Georgia agreed, inter alia, to admit PTC-Georgia into the Georgia GSL Program and to process FSL applications submitted by PTC-Georgia students in accordance with the Act. Upon receiving information that the parties had settled their differences, I directed entry of an Order on October 15, 1992 dismissing this case with prejudice under Local Rule of Civil Procedure for the Eastern District of Pennsylvania ("Local Rule") 23(b).
Little more than one month later, PTC filed a motion under Local Rule 23(b) to vacate my Order of dismissal, reactivate this case, and declare Georgia in contempt of court, claiming that Georgia had already violated the terms of the settlement agreement. Among other things, PTC complained that Georgia, as a "lender of last resort" under the Stafford Loan Program, had failed to abide by its agreement to process PTC-Georgia student loan applications in accordance with the Act by refusing to make FSLs to certain students on the basis of their credit histories.
By Memorandum and Order dated February 5, 1993, I denied PTC's motion to hold Georgia in contempt; but, finding that it had shown sufficient cause under Local Rule 23(b), I granted PTC's motion to vacate my Order of dismissal and reactivate this case for the sole purpose of enforcing the terms of the settlement agreement.
PTC has filed a motion for partial summary judgment on the issue of whether Georgia, acting as a lender of last resort under the Stafford Loan Program, violated the Act and, accordingly, the settlement agreement by making FSL lending decisions on the basis of information disclosed in the students' credit history. The parties agree that (1) Georgia is a "lender of last resort" for purposes of the Stafford Loan Program; (2) Georgia agreed in the settlement agreement to process FSL applications submitted by PTC-Georgia students in accordance with the Act;
and (3) Georgia considers the credit history of PTC-Georgia students and has denied FSLs to certain PTC-Georgia students on the basis of their "derogatory" credit history, as determined by Georgia.
Thus the only issue before me is the legal question of whether the Act permits a lender of last resort under the Stafford Loan Program to base its FSL lending decisions upon information revealed in the applicant's credit history?
Congress has identified the following four purposes of the Stafford Loan Program: (1) "to encourage States and nonprofit private institutions and organizations to establish adequate loan insurance programs for students in eligible institutions"; (2) "to provide for a Federal program of student loan insurance for students or lenders who do not have reasonable access to a State or private nonprofit program of student loan insurance"; (3) "to pay a portion of the interest on loans to qualified students which are insured under [the Stafford Loan Program]"; and (4) "to guarantee a portion of each loan insured under a program of a State or of [an eligible] nonprofit private institution or organization." 20 U.S.C.A. §§ 1071 (West 1990). In addition to encouraging and/or providing for student loan insurance and student loan guarantees, and paying for a portion of interest on student loans, Congress also saw fit to provide in the Stafford Loan Program for lenders of last resort ("LLRs"). See 20 U.S.C.A. § 1078(j).
As recently amended, the LLR provision of the Stafford Loan Program states, in pertinent part, as follows:
(1) General requirement--
In each State, the guaranty agency or an eligible lender in the State . . . shall make loans . . . to students eligible to receive interest benefits paid on their behalf under subsection (a) of this section who are ...