This blog is part of an SBPC report series about using consumer financial law to protect borrowers of Income Share Agreements, emerging and risky higher education financing products that require students to pledge a portion of their future income in exchange for money to pay for college or certain non-degree programs. More information on ISAs can be found here. Information on the upcoming SBPC virtual conference on ISAs can be found here.
The Role of States in Protecting Students in the ISA Market
By Benjamin Roesch | August 4, 2020
Schools and lenders that offer income share agreements often make the false claim that these financial products are not “loans” and therefore not subject to state consumer financial laws. This resistance to the application of traditional state consumer finance and protection law, and to oversight by state regulators, raises significant consumer protection concerns. A new SPBC report I published today, Applying State Consumer Finance and Protection Law to Income Share Agreements, finds that while ISAs are a relatively recent development in the student loan market, they share important common features with well-established loan products and fall squarely within those statutes.
Applying State Consumer Finance and Protection Law to Income Share Agreements builds on previous analysis that concluded ISAs are “credit” under federal consumer finance laws and finds that ISAs are “loans” and “debt” as those terms are used in most state consumer finance laws. Tracing industry and regulatory developments back to the Great Depression, when payday lenders used these same arguments (i.e. payday loans were not “loans” because they were “purchasing” future wages), the paper examines a variety of state consumer finance laws and concludes that these state laws, like their federal counterparts, apply to ISAs.
Applying State Consumer Finance and Protection Law to Income Share Agreements can be found here: https://protectborrowers.org/wp-content/uploads/2020/08/ISAs-and-State-Law.pdf
Because ISAs are subject to state laws regulating consumer loans, a wide variety of state laws apply to ISA providers, servicers, and collectors, as well as the schools through which they are offered. For example:
- ISA originators must be licensed and are subject to oversight by state financial regulators;
- In states that have passed student loan servicing laws, the companies that service educational ISAs must also be licensed and submit to state oversight; and
- The repayment terms of some ISAs will result in unlawful usury in many states.
In addition to the above examples, state consumer protection statutes that prohibit unfair and deceptive acts or practices also apply to schools and ISA providers. This report details several ways in which ISA providers and their affiliated schools have marketed ISAs deceptively, trapping students into expensive financing arrangements when cheaper student loans may have been in the students’ best interests. The ISA industry’s decision not to abide by these consumer finance and protection statutes creates massive borrower risk and leaves ISA providers and servicers, as well as the schools who help market ISAs, subject to the rescission of ISA agreements, consumer restitution, civil penalties, and prohibitions on doing business under state laws across the country.
The growth of ISAs as a financing tool for education requires a coordinated response. This will need to include participation from regulators overseeing schools and their admissions and financial aid offices; financial regulators who supervise loan originators, servicers, and debt collectors; as well as attorneys general charged with enforcing state consumer protection statutes and empowered to enforce many applicable federal consumer financial laws. Existing state law provides a robust toolkit to protect ISA borrowers, and there should be no doubt that ISAs fall within those tools’ reach.
Benjamin Roesch is an SBPC fellow who is an expert on consumer finance and insurance issues.