CFPB Takes Action Against Income-Share Agreement Provider

By Owen Daugherty, NASFAA Staff Reporter

A recent announcement from the Consumer Financial Protection Bureau (CFPB) could have major implications for how an alternative method to finance one’s higher education is regulated going forward. 

In a consent order posted Tuesday, the CFPB detailed allegations against Virginia-based Better Future Forward (BFF), an income-share agreement (ISA) provider that was alleged to have misled students about ISAs. The company misrepresented its product and failed to comply with federal consumer financial law, according to the CFPB.

The CFPB’s settlement with BFF is the first major federal action against a provider within the growing ISA industry and could set the terms for how the federal government plans to oversee other companies in the ISA space.

While relatively unknown and not a common method for financing education, ISAs are growing as an alternative type of student loan financing where a borrower receives a loan and then pays a percentage of their income once they graduate. 

ISA providers have sought to portray the financing mechanism as something other than a loan, meaning it wouldn’t be regulated the same way private loans are and wouldn’t be affected by consumer protection law. In a statement issued by the CFPB Tuesday accompanying the consent order, the agency made clear it feels otherwise.

“The ISA industry has tried to evade oversight by claiming that its products are not loans,” Dave Uejio, CFPB’s acting director, said in a press release. “But regardless of the name on the label, these products are credit and have to comply with federal consumer protections. The ISA industry cannot pretend that core consumer protection laws do not apply to their products.”

Under terms outlined in the consent order, BFF will stop stating that its ISAs are not loans or don’t create debt for consumers and must provide borrowers with loan disclosures, including finance charges, the amount financed, the annual percentage interest rate and other disclosures required for private education loans.

Due to BFF demonstrating “good faith and substantial cooperation” throughout the process, according to the consent order, CFPB decided to not impose financial penalties on the non-profit ISA provider.

“We appreciate the Bureau’s recognition of our demonstrated good faith and cooperation throughout this process, as reflected in the Consent Order,” Kevin James, CEO of BFF, said in a statement. “While there has been uncertainty about the application of the existing federal loan disclosure regime to risk-sharing tools like ISAs, we believe CFPB’s oversight role is critical and are eager to work with the Bureau to bring clarity to these questions around how federal disclosures should apply to BFF’s ISAs.”

CFPB’s move comes after California regulators said it would apply more oversight to ISAs and treat them as private student loans under the state’s student loan servicing law, a decision that many saw as a precursor to the announcement from CFPB.

The CFPB’s action this week is not the same as regulation though, and may not provide clarity to other ISA providers, said Jonathan Joshua, special counsel at Manatt, Phelps & Phillips, LLP, a professional services firm, with a focus on financial regulations.

“You've probably heard a lot of talk about regulation by enforcement,” he said. “But this is just enforcement without the regulation part. ISA providers still need further direction on what the CFPB wants, other than the generic compliance with what the CFPB views as applicable law.”

Considering there is significant variation in the types of ISAs that providers offer to students, it would be difficult to enforce regulations in a one-size-fits-all approach. While there have been attempts from lawmakers on both sides of the aisle to put forward legislation surrounding ISAs, none have made much progress in Congress.

“There’s been this increasing recognition to build some kind of regulatory certainty around income-share agreements but I think the announcement yesterday to a lot of people feels like the first real concrete step to put to rest where income-share agreements fit in the financial services landscape,” said Carlo Salerno, the vice president of research at CampusLogic.

For institutions seeking to wade into the ISA space and partner with a provider to offer them to students, Joshua advised fully understanding the market they could potentially enter.

“Given the CFPB opinion that [ISAs] are they should structure an income-based loan to comply with the various requirements” is what schools should be asking, Joshua said. Institutions should “look closely at what's required in getting involved in student loans, as well as if they want to do it. If they decide to move forward, they have to think it through and make sure they have built a program that is right for students and their institution.”

For its part, a Department of Education spokesperson told NASFAA that the department plans to consult with the CFPB to better advise colleges that endorse ISAs and are required to comply with preferred lender rules.

“Under the preferred lender rules, colleges that endorse private loan products are required to advocate for their students’ best interests, including publicly documenting why they endorse a particular private loan and commit to a code of conduct that prohibits revenue sharing,” the spokesperson said. “These are good practices for colleges to consider when endorsing any financial product.”


Publication Date: 9/10/2021

David S | 9/10/2021 11:47:04 AM

Unless/until ISA's are regulated with students' interests in mind, I wouldn't touch them with a 10 foot pole. And one ISA provider, at least in my experience a few years ago, marketed itself as something a school could use as a tuition discounting strategy. To me that's a branding activity strictly forbidden within the guidelines we must follow for lender lists.

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