By Benjamin Roesch | March 11, 2021
Companies peddling income share agreements (ISAs) have long relied on deceptive marketing tactics, potentially discriminatory lending practices, and evasions of state and federal consumer protection law to promote their risky products. As COVID has emerged and worsened over the past year, the ISA industry has made clear its intent to capitalize on the crisis. A wide range of institutions from public colleges to non-profit vocational training organizations offer ISAs. But one corner of the market—the for-profit coding bootcamp space—is especially reliant on the product, and the outbreak of COVID has coincided with growing evidence that longstanding doubts about the quality of the education these firms offer are well founded.
The results of a new investigation published today by the SBPC offer new evidence that for-profit coding bootcamps and ISA companies may be systemically violating federal law by omitting a legally mandated term from the contracts underlying students’ ISAs—language required under the Federal Trade Commission’s (FTC) “Holder Rule.” The Holder Rule is a federal regulation intended to help consumers when a defective or fraudulent product or service is purchased with credit extended directly by the seller or arranged by the seller. The rule allows the consumer to assert the seller’s fraud (or the product’s defect) as a defense to repayment of their credit obligation, even where a new entity owns their credit contract—or even to sue for reimbursement of money already paid for the fraudulent or defective products or services. In addition to being against the law, the omission of this required contract language could leave tens of thousands of students holding the bag when lofty promises from coding schools disappointingly manifest in low-quality educational products.
We have outlined these findings in a memorandum sent today to law enforcement officials across the country requesting immediate action to investigate and hold for-profit coding bootcamps and their ISA partners accountable. State and federal law authorities must step in to protect borrowers and prevent schools from depriving consumers of their rights through unfair practices that were banned 45 years ago.
The FTC’s “Holder Rule” has been called the FTC’s “most effective tool against fraud” and “the best thing the FTC has ever done.” Indeed, the explosion of predatory and fraudulent for-profit schools in the 1980s, a decade during which Congress misguidedly exempted student loans from the Holder Rule, demonstrates that without this important consumer protection both individual consumers and the marketplace for educational services suffer.
But there’s a catch: the Holder Rule does not apply automatically as a protection for defrauded consumers. Instead, the Holder Rule requires sellers to include specific contractual language that preserves the borrower’s rights. If the seller fails to include this language and then transfers the credit contract, the borrower may lose their rights.
As outlined in our memo, the Holder Rule applies to the ISAs issued by coding bootcamps and other post-secondary educational institutions, meaning that schools are supposed to be putting this language in their ISAs. Indeed, the ISA industry’s likely excuse for eliminating borrowers’ Holder Rule rights—the spurious argument that ISAs are not “credit” under applicable federal law—has already been thoroughly debunked in previous scholarship by leading experts in consumer finance.
The SBPC has examined ISAs issued by various for-profit coding bootcamps, which are vocational or career training institutions that promise to equip students with the computer programming skills necessary for high-paying jobs in the technology sector. Schools examined in our investigation include Lambda School and Rithm School. We supplemented this research by inspecting the ISA contract of another school offering the product, Purdue University. These schools often promote ISAs as a way for students to finance their education. Alarmingly, it appears that none of the ISAs examined contained the language mandated by the Holder Rule.
Ensuring that borrowers have the tools—including through their rights under the Holder Rule—to protect themselves from deception, fraud, and failure by companies to provide promised educational services is particularly important in the context of for-profit schools, including for the bootcamps that routinely omit Holder Rule language from their ISAs. In recent years, coding bootcamps have been sanctioned for operating without approval from state regulators and have been credibly accused of inflating their job placement rates, engaging in other advertising and recruiting misconduct, and failing to deliver the education promised to their students.
The omission of required language from ISAs to which the Holder Rule applies violates prohibitions on unfair and deceptive acts and practices found in the Federal Trade Commission Act, the federal Consumer Financial Protection Act, and state consumer protection statutes nationwide. The officials charged with enforcing these statutes must take immediate action to restore students’ rights under the Holder Rule by reforming credit contracts and to ensure that Holder Rule language is included in any ISAs issued going forward.
During the last recession, for-profit college enrollment exploded, leaving millions of students worse off even years later. There are already signs that history is poised to repeat itself during and after COVID. In a recent tweet, for example, the coding bootcamp Lambda School stated, “[d]uring economic instability, income share agreements can be a great tool to make higher ed more accessible & lower risk.” This is the same Lambda School that has been sanctioned by state regulators and that appeared in the analysis above to be currently omitting the key language of the FTC’s Holder Rule. State and federal law enforcement have the tools to make sure the cycle of predatory for-profit schools and student harm does not replay in the coming years. But they must act before it’s too late. And the clock is ticking.
Read more about the SBPC’s work related to income share agreements here.
Benjamin Roesch is a Senior Fellow at the Student Borrower Protection Center. He has significant experience in consumer finance and insurance issues.