United States: CFPB states that income-sharing arrangements are credit products
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On September 7, 2021, the CFPB announced that it had received an approval order with non-profit education funding (“non-profit”) in connection with the offer of Income Share Agreements (“ISAs”) by the non-profit organization. In the consent order, the CFPB stated that ISAs are loan extensions that fall under the Consumer Financial Protection Act and the Truth in Lending Act (“TILA”), as well as TILA’s requirements for “personal education loans“. Because the CFPB claims in the consent order that it regards 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 arrangement has a significant impact on the ISA market as it shows how the CFPB views the re-characterization for ISAs and similar products.
Most ISAs are agreements whereby students receive education funding on the condition that the student pays an agreed percentage of the student’s future income over a defined period of time after graduation. Many ISAs do not require their customers to pay until their income exceeds a contractually agreed floor. Any percentage of income in excess of this minimum will be paid to the ISA provider as return on investment, subject to possibly an upper limit on total payments depending on the terms of each ISA. With many current ISA structures, it is conceivable that some customers will ultimately pay nothing within the defined time frame after completing their studies and therefore the ISA will expire without any obligation to pay; other customers pay less than the financing originally provided; and a final group of customers pays amounts in excess of the original funding (although, as noted, they are often subject to a total payment cap). While most ISAs provide education funding, similar products are available to fund consumers, small businesses, and even professional athletes.
Because of their structure, ISA providers generally take the position that ISAs are not loans and therefore are not subject to the requirements of many federal consumer financial protection laws. With this comparison, the CFPB appears to reject this position. The Consent Order summarizes that the “nonprofit organization’s” ISAs are loans under the CFPA because they give consumers the right to defer payment of a debt, incur and defer payment of a debt, or to purchase property or services and pay for postpone such a purchase. ‘”In a statement of settlement, CFPB Acting Director Dave Uejio said:”[t]he ISA industry has tried to evade supervision by claiming that its products are not credit. . . [b]ut regardless of the name on the label, these products are credit and must comply with federal consumer protection. The ISA industry cannot pretend that major consumer protection laws do not apply to their products. “
The consent order published by the Bureau contained statements that the non-profit organization:
- Engaged in fraudulent acts and practices by misrepresenting that ISAs are not loans and do not create debt;
- Denial of information to consumers that is necessary to fully assess their financial capabilities by failing to disclose personal education loans under TILA and its Implementing Regulation, Regulation Z; and
- Student loan borrowers are subject to early repayment or prepayment fees or penalties in violation of the TILA by calculating the total payment cap for certain ISAs by instantly adding 10% to the sponsored amount. The Bureau argued that if a student paid off the ISA earlier than planned, the student would potentially pay more than the amount funded plus the growth component.
According to the conditions of the consent order, the non-profit organization is obliged to:
- Reform each of its outstanding Opportunity ISAs to eliminate the 10% surcharge on funded amount when calculating the total payment cap;
- Stop claiming that its ISAs are not credit or create debt for consumers;
- Providing disclosures required by TILA and Regulation Z for personal educational loans;
- Continuing the practice of not objecting to the dissolution of a student’s ISA in bankruptcy, including not denying that repaying a student’s ISA would constitute undue hardship; and
- Do not impose a prepayment penalty on a personal education loan and recalculate payment caps with certain ISAs to remove the prepayment penalty.
In particular, the CFPB did not impose a civil fine on the nonprofit organization in return for good faith and substantial collaboration with the Bureau.
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