September 7, 2021 | WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau announced an enforcement action against a private student lender offering a risky kind of financial product known as an income share agreement (ISA), alleging that the company, Better Future Forward, Inc. was misleading consumers. This action marks the first public federal enforcement action against an Income Share Agreement provider and sets the stage for increased regulatory scrutiny of the ISA industry. Earlier this month, the California Department of Financial Protection and Innovation announced the first public enforcement action by a state regulator against an ISA provider.
In response to today’s action, the Student Borrower Protection Center released the following statement:
“The CFPB’s action shows that no private student lender is above the law. Despite industry attempts to evade consumer protections, federal law is clear—income share agreements have always been a form of consumer credit and all borrowers are entitled to the same rights and protections, regardless of whether they took out an ISA engineered by Silicon Valley or a traditional loan from a big bank.
Nearly every aspect of the ISA model harms consumers and is illegal: from the discriminatory impact on women and borrowers of color, to the predatory interest rates, the tricks and traps designed to lure vulnerable borrowers into high-cost debt. Now is the time for law enforcement officials at all levels of government to act swiftly to hold this rogue industry accountable and provide justice to borrowers.”
Income Share Agreements are risky financing products that require students to pledge a portion of their future income in exchange for money to pay for college or training programs. ISAs have been touted by Wall Street and Silicon Valley as a solution to the student debt crisis, but these products pose serious risks to students. A long line of investigations and legal actions against ISA companies has revealed that the industry’s business model depends on questionable and illegal conduct, including the spurious claim that ISAs are not loans or a form of credit.
ISAs are increasingly used as an alternative type of student loan. Over $250 million in ISAs were originated in 2019, and analysts expected $500 million in ISAs to be originated in 2020 before the COVID pandemic began. Though industry-wide data are not available, industry reports and marketing materials indicate that the ISA industry has ramped up operations during the national emergency. Further, the association between ISAs and the types of predatory, for-profit career training programs known to take advantage of economic downturns implies that the volume of ISAs originated in 2020 and 2021 may have ultimately been much larger than those in preceding years and may continue to grow at a rapid pace.
In 2020, the SBPC documented in a report, how—regardless of industry’s claims otherwise—ISAs fall squarely within the definitions of “credit” and “debt” for the purposes of federal consumer financial law. In analyzing the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Truth in Lending Act, and the Consumer Financial Protection Act of 2010, the report made clear that ISAs are clearly within the ambit of existing consumer protections, and that firms operating in the ISA market will not escape scrutiny for predatory, abusive, discriminatory, or otherwise unfair behavior.
Beyond denying that they have to follow the law, firms operating in the ISA market have also been caught engaging in the following harmful practices:
- Relying on Deceptive Marketing. The National Consumer Law Center and the SPBC filed a complaint with the Federal Trade Commission alleging the ISA provider Vemo engaged in a range of deceptive marketing tactics related to Vemo-backed ISAs offered by Purdue University and the University of Utah.
- Servicing and Collecting Void, Unenforceable Debts. Prominent legacy student loan companies may be servicing and collecting on ISAs made in violation of state licensing or usury laws. The servicing or collection of void, unenforceable debts may be an unfair practice in violation of federal and state consumer law.
- Engaging in Racial Discrimination. The NAACP Legal Defense Fund and the SBPC demanded ISA provider Stride Funding cease discriminatory lending practices that appear to charge students attending Historically Black Colleges and Universities more than similarly situated borrowers who attend predominantly white colleges.
- Charging Illegal Prepayment Penalties. A review of publicly available ISA agreements reveals that in most cases, ISA providers charge borrowers extremely high prepayment penalties, locking vulnerable borrowers into high-cost subprime credit—a practice common among predatory mortgage lenders in the years before the financial crisis. The federal Truth in Lending Act bans this practice for all private student lenders, including ISA providers.
The SBPC works with advocates, legal experts, and government partners to analyze and expose the potential harm ISAs cause to borrowers. This work includes original reports and analysis on ISAs and consumer protection, investigations into unscrupulous practices by ISA providers, an emerging risks conference, and complaints filed with regulators on behalf of harmed borrowers.
Last month, the SBPC supported a class action lawsuit brought by dozens of students against for-profit coding academy MakeSchool and ISA company Vemo Education alleging a wide range of fraudulent and deceptive practices.
View more of the SBPC’s work on ISAs, emerging risks, and consumer protection here.