Income-share agreements are loans, and provider misled students, CFPB says

Dive Brief:

  • The Consumer Financial Protection Bureau moved against a nonprofit organization that provides income-share agreements, saying it misrepresented the nature of ISAs, didn’t comply with federal law regulating private student loans, and imposed illegal fees or penalties for early repayment.
  • A consent order announced Tuesday requires the provider, Virginia-based Better Future Forward, to stop saying that its ISAs are not loans. It must also provide lending disclosures required under federal law and make changes to its ISA contracts.
  • Better Future Forward believes the “CFPB’s oversight role is critical” against an uncertain policy framework for ISAs, the organization’s CEO said in a statement. The federal agency didn’t hit the nonprofit with financial penalties, saying it showed good faith and cooperation beyond what the law requires.

Dive Insight:

ISAs provide money to help students cover expenses like tuition and fees. In return, those students agree to pay a percentage of their post-graduation earnings over a number of years. Exact details can differ, but ISAs can be structured so that payments don’t kick in below certain earnings thresholds and with a cap on lifetime payments.

The CFPB’s move could have significant ramifications for ISAs, a long-discussed idea for funding students’ college education while attempting to minimize the risk that they won’t be able to pay back their student loans. It’s the second major regulatory development affecting the fledgling financial products in about a month after California’s Department of Financial Protection and Innovation said in August it will treat ISAs as student loans.

A range of voices has backed ISAs, from researchers at conservative think tanks to college presidents. Some prominent institutions operate them, like Purdue University, which positions its Back a Boiler fund as an alternative to Parent PLUS and private student loans for students who need additional funding on top of their federal student loans.

Purdue’s president, Mitch Daniels, has advocated for the idea, writing in 2019 that under an ISA, “a student borrows nothing but rather has his or her education supported by an investor, in return for a contract to pay a specified percentage of income for a fixed number of years after graduation.”

But not everyone agrees an ISA means a student borrows nothing. Whether ISAs are loans has been hotly contested, in part because debt products are strictly regulated.

The CFPB’s new action against Better Future Forward could be seen as a shot across the bow of other ISA providers.

“The ISA industry has tried to evade oversight by claiming that its products are not loans,” the CFPB’s acting director, Dave Uejio, said in a statement. “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.”

Better Future Forward deceived student borrowers by telling them ISAs are not loans, according to the CFPB consent order. It then didn’t provide disclosures that are required for private educational loans under federal law.

The CFPB also found that the nonprofit violated a prohibition on early repayment penalties because it calculated a total payment cap by adding 10% to the amount it funded. That effectively meant a student who paid off an ISA early could pay more than the amount funded plus a growth component.

Better Futures Fund has advocated for policymakers to outline clear rules for ISAs, the organization’s CEO, Kevin James, said in a statement.

The CFPB order also requires Better Futures Fund not to object to discharging student ISAs in bankruptcy. The nonprofit already had that practice in place.

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