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Domino: A Blog About Student Debt It’s Time for Regulators to Scrutinize ISA Companies’ Emerging Rent-a-Bank Schemes

It’s Time for Regulators to Scrutinize ISA Companies’ Emerging Rent-a-Bank Schemes

By Ben Kaufman | April 20, 2021

Today, the SBPC, along with Americans for Financial Reform Education Fund, the California Reinvestment Coalition, the Center for Responsible Lending, Consumer Reports, and the National Consumer Law Center sent a letter to the Office of the Comptroller of the Currency (OCC)— the nation’s top bank regulator—urging careful scrutiny of the “partnership” between Blue Ridge Bank, a federally chartered national bank, and MentorWorks, a student financing company that offers Income Share Agreements (ISAs). In particular, representations on MentorWorks’s website indicate that the two companies have engaged in a cooperative agreement that involves Blue Ridge Bank originating ISAs on MentorWorks’s behalf. As our letter describes, such a partnership is likely to put student loan borrowers at risk and appears not to fit within the OCC’s stated guidelines for risk management around new bank products and services. With the ISA market growing rapidly and companies in the space pushing the product ever more aggressively, it is critical that regulators step off the sidelines and ensure that ISA companies are acting in accordance with existing laws and regulations.

Read the Letter: Letter to the OCC on MentorWorks

ISAs are a risky form of student financing that ties students’ loan payments to their future wages. Despite ISAs’ lofty branding, it is now well documented that these products and the companies that tout them have a track record of deploying deceptive business practices and driving disparate impacts that harm students of color, all while claiming they don’t need to comply with federal and state consumer protection laws. It is increasingly clear that the ISA business model depends on this questionable and possibly illegal conduct.

ISA companies’ track record should be extremely concerning to the OCC, which works to ensure that national banks like Blue Ridge Bank “operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” In particular, the OCC has stated that any new activities that banks engage in should be “developed and implemented consistently with sound risk management practices,” should “encourage fair access to financial services and fair treatment of consumers,” and should “in compliance with applicable laws and regulations.” 

Our letter warns that the participation of Blue Ridge Bank—or any federally chartered bank—in the ISA market clearly runs the risk of violating the OCC’s guidelines for prudent risk management. Evidence for these concerns includes the following:

  • Companies promoting ISAs claim they are beyond the reach of consumer protection laws, including by asserting that ISAs are not a form of credit. The ISA industry insists that its products aren’t “credit” or a “loan,” and that it therefore doesn’t have to comply with the range of federal and state laws and regulations that protect borrowers from predatory conduct. MentorWorks is no exception, as the company states that its ISAs are “not a loan” and that ISAs in general are “student loan alternatives.” But legal experts have exhaustively debunked these claims and firmly established that ISAs must follow a host of consumer protection statutes and rules. These obligations include compliance with the Truth in Lending Act, the Equal Credit Opportunity Act, the Consumer Financial Protection Act, the Federal Trade Commission Act, the Military Lending Act, and various other state and federal regulations. The ISA industry’s ongoing—yet false—claims about the applicability of these laws could generate serious risks as violations lead to lawsuits and other legal actions, undermining the OCC’s stated precepts for conduct related to new business activities.
  • ISAs involve inherent fair lending risk. To boost their bottom line, ISA companies charge students with lower expected incomes—as proxied by students’ major and choice of school—more than students with higher expected incomes. This is because charging uniform rates for ISAs would lead to “adverse selection,” meaning that only students with low expected incomes would likely choose to use the product. But since income levels, college choice, and major selection are all closely associated with race in the U.S., allowing for differences in ISA pricing based on borrowers’ educational background necessarily opens the door for fair lending violations. This is not just a theory—a recent investigation into the ISA lender Stride Funding, which varies its product terms in part based on borrowers’ course of study and institution attended, found that the company quotes students prices for its ISAs that are thousands of dollars higher if the students attend a Minority-Serving Institution (MSI) such as a Historically Black College or University than if they attend a non-MSI. We have already seen other prudential regulators bring enforcement actions around similar claims. The fair lending risk baked into the ISA business model would expose any bank in the ISA market to substantial legal and reputational danger, a concern that appears to be in direct conflict with the OCC’s principles for appropriate business conduct.
  • ISAs have an established history of noncompliance with critical consumer protections. Companies in the ISA market have been caught engaging in a wide array of misleading, unfair, and possibly illegal behavior. This conduct includes illegally omitting certain language from consumer contracts that protects borrowers from fraud, deceptively misrepresenting the cost of ISAs and competing products, and ignoring a statutory ban on so-called “prepayment penalties” for private education loans, a predatory variety of charge that locks financially strapped borrowers into expensive credit. Research also indicates that ISA companies charge borrowers rates high enough to possibly violate key consumer protections such as the Military Lending Act, frequently associate themselves with dubious schools, and may increasingly be subject to incentive misalignment arising from an emerging “originate to distribute” model similar to that seen in the mortgage space in the run-up to the last financial crisis. As our letter outlines, there is evidence that MentorWorks may be engaging in many of these practices, raising serious questions for the OCC about the firm’s partnership with Blue Ridge Bank.

The history of student lending is dotted with examples of companies introducing new products they claim will help expand access and affordability in higher education, only for borrowers to ultimately be harmed as these products’ disastrous faults come to light. Some of the most notorious examples of this pattern have specifically involved new entrants to the student loan market relying on national banks’ charters to originate doomed loans on their behalf.

The OCC must step in now to ensure that history does not repeat itself at a massive cost to borrowers through national banks’ entrance into the ISA market.

Read more about the SBPC’s work related to income share agreements here.

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Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.

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