September 21, 2021
Income-share agreements are at a legal crossroads after regulators put a stake in the ground saying ISAs are loans.
The federal Consumer Financial Protection Bureau said Sept. 7 that it issued a consent order against Better Future Forward, a Virginia-based nonprofit that issues ISAs. The CFPB is requiring Better Future Forward to provide disclosures required under federal consumer financial law, to change the way it calculates payment caps to avoid prepayment penalties, and to stop saying its ISAs aren’t loans.
Those specifics are important, but they may be incidental for the ISA sector compared to the enforcement direction the CFPB is signaling. Its acting director, Dave Uejio, said in a statement recently that “The ISA industry cannot pretend that core consumer protection laws do not apply to their products.”
ISAs arguably contain elements of several different types of financial products: loans, insurance and equity. They provide money to help students cover expenses like tuition and fees, and in return those students agree to pay a percentage of their post-graduation earnings over a contract term. They can be designed so students don’t have to pay unless they earn a certain amount, and they can include a cap on lifetime payments.
Whether an ISA amounts to a loan might sound like an academic debate, but it’s a debate with a significant impact on which laws apply to ISAs. And the regulatory framework matters if ISAs are to grow as a source of funding for students seeking college degrees or credentials.
As such, some ISA backers saw the CFPB’s action as a blow to a fledgling sector that seemed like an alternative to saddling students with traditional student loans they may not be able to pay off. “This action by the CFPB was both predictable and unfair,” Beth Akers, a senior fellow at the American Enterprise Institute and supporter of ISAs, said in an email.
Akers characterized the CFPB action as signaling that “ISAs, even if designed to have generous terms for the borrower (as is the case with contracts made by BFF), are in some way predatory. BFF is a non-profit organization that, in my opinion, would never seek to make a financial gain by misleading students.”