LINCOLN EDUCATIONAL SERVICES CORP 10-Q

Item 1A. RISK FACTORS In a class action before the U.S. District Court for the Northern District of California ( Sweet v. Cardona , No. 3:19-cv-3674 (N.D. Cal.)), a settlement is under consideration which could result in the automatic approval of all pending borrower defense applications submitted to the DOE on or before June 22, 2022 concerning our institutions and, if approval were to occur, the DOE could elect to seek recoupment from us of all loan amounts in the approved applications. On June 22, 2022, the DOE and plaintiffs in a class action lawsuit before a federal court in California submitted a proposed settlement agreement to the court. The plaintiff class is not limited to students who attended our schools and generally includes all people who borrowed a Title IV Direct loan or FFEL loan, who have asserted a borrower defense to repayment claim to the DOE, and whose borrower defense claim has not been granted or denied on the merits. The court is scheduled to consider the settlement agreement at a hearing on November 9, 2022. If the court grants final approval of the settlement agreement, the DOE is expected to automatically approve all of the pending borrower defense applications submitted to the DOE concerning us on or before June 22, 2022 and to provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us and without providing notice and opportunity to respond to applications that were not provided to us. The automatic approval of the applications would result in the full discharge of the borrowers’ loans and the refund of payments made on the loans by the borrowers. We have not received notice or confirmation directly from the DOE of the number of student borrowers who have submitted borrower defense to repayment claims related to our institutions. The DOE could elect to seek to recoup from us the loan amounts in the approved applications and to take other actions or impose other sanctions on us based on the cost of providing relief to students under the proposed settlement agreement. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider options for challenging the legal and factual basis for attempting to recoup these liabilities. The settlement agreement also requires the DOE to review borrower defense applications submitted after June 22, 2022, and by the date of the final approval of the agreement within 3 years under procedures described in the agreement. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts in these applications. We cannot predict whether the currently proposed settlement will be approved, what actions the DOE might take if the proposed settlement is approved (including the ultimate timing or amount of borrower defense applications the DOE may grant in the future and the timing or amount of any possible liabilities that the DOE may seek to recover from us, if any), or what the outcome of any challenges we might make to such actions will be, but such actions could have a material adverse effect on our business and results of operations. For more information, see “Part II. Item 1 – Legal Proceedings.”