On September 7, 2021, the CFPB announced that it had entered into a consent order with an education finance nonprofit (“nonprofit”) in connection with the nonprofit’s offering of income share agreements (“ISAs”). In the consent order, the CFPB asserted that ISAs are extensions of credit covered by the Consumer Financial Protection Act and the Truth in Lending Act (“TILA”) as well as TILA’s requirements with respect to “private education loans.” Because the CFPB asserts in the consent order that it views the nonprofit’s ISAs as credit, the CFPB takes the position that they are also subject to numerous other federal consumer financial protection laws that impose requirements and restrictions on student loan products. This consent order has significant implications for those in the ISA market, as it indicates how the CFPB views re-characterization for ISAs and similar products.
Most ISAs are agreements under which students are provided education funding on the condition that the student pay an agreed-upon percentage of the student’s future income over a defined, post-graduation timeframe. Many ISAs do not require customers to pay anything until their income exceeds a contractually defined floor. A percentage of income exceeding that floor is paid to the ISA provider as an investment return—potentially subject to a cap on overall payments depending on the terms of the specific ISA at issue. Under many common ISA structures, it is conceivable that some customers ultimately will pay nothing in the defined, post-graduation timeframe and, therefore, will see the ISA expire without any payment obligation; other customers will pay an amount less than the funding originally provided; and a final set of customers will pay amounts exceeding the original funding (though, as noted, frequently subject to a total payment cap). While most ISAs provide educational funding, similar products exist to provide funding to consumers, small businesses, and even professional athletes.
Given their structure, ISA providers have generally taken the position that ISAs are not credit and, therefore, are not subject to the requirements of many federal consumer financial protection laws. With this settlement, the CFPB appears to reject that position. The consent order summarily states that the nonprofit’s “ISAs are credit under the CFPA because they grant consumers the right ‘to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment for such purchase.’” In a statement on the settlement, Acting CFPB Director Dave Uejio said, “[t]he ISA industry has tried to evade oversight by claiming that its products are not loans . . . [b]ut 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.”
The consent order released by the Bureau included findings that the nonprofit:
- Engaged in deceptive acts and practices by misrepresenting that ISAs are not loans and do not create debt;
- Denied consumers information necessary to fully evaluate their financial options by failing to provide disclosures for private education loans as required under TILA and its implementing regulation, Regulation Z; and
- Subjected student borrowers to fees or penalties for early repayment or prepayment in violation of the TILA, by calculating the total payment cap on certain ISAs by immediately adding 10% to the amount funded. The Bureau reasoned that if a student paid off the ISA earlier than scheduled, the student would potentially pay more than the amount funded plus the growth component.
Under the terms of the consent order, the nonprofit is required to:
- Reform each of its outstanding Opportunity ISAs to eliminate the addition of 10% to the amount funded in calculating the total payment cap;
- Stop stating that its ISAs are not loans or do not create debt for consumers;
- Provide disclosures required by TILA and Regulation Z for private education loans;
- Continue the practice of not objecting to any discharge of a student’s ISA in bankruptcy, including not contesting that repaying a student’s ISA would present an undue hardship; and
- Not impose a prepayment penalty on a private education loan and, for certain ISAs, recalculate the payment caps to eliminate the prepayment penalty.
Notably, the CFPB did not impose any civil money penalty on the nonprofit in consideration for good faith and substantial cooperation with the Bureau.