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.

This is not the Credit You’re Looking for:

Why Jedi Mind Tricks Won’t Work for ISAs

By Joanna Pearl and Brian Shearer | July 21, 2020

Lenders offering Income Share Agreements (ISAs) claim they have found the perfect loophole to sidestep federal law. They argue that ISAs are “not credit,” and therefore federal consumer financial laws don’t apply. These companies have bet their business on this assumption, accruing massive liability if they are wrong.

Our report, published today, shows this is a losing bet. We analyzed the federal laws that protect consumers in “credit” transactions and determined that they all apply to ISAs. These laws—the Equal Credit Opportunity Act (ECOA), the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010 (CFPA)—prohibit discrimination in lending; govern accuracy and fairness in credit reporting; set rules for third-party debt collection; require lending disclosures; and proscribe unfair, deceptive, and abusive acts and practices in consumer financial transactions.

Simply put, ISAs are agreements through which student borrowers get money, in exchange for a promise to repay that money in the future. That is an extension of credit, and no technicality can change it. It does not matter that borrowers could theoretically pay $0, that there is no articulated interest rate, or that the monthly payment isn’t fixed. These features appear in other credit products too, such as student loans, credit cards, variable-interest loans, and payday loans. They don’t make ISAs special or immune to existing laws.

The new report, Credit by any Other Name, can be found here: https://protectborrowers.org/paper-series-consumer-law-and-income-share-agreements/

As we explain, federal consumer financial law clearly applies to ISAs, and the consequences are significant. ISAs have not yet been subject to enforcement action and regulation by state and federal authorities, but that is not because ISA lenders have found the perfect work-around for federal law. As ISAs grow in prevalence and the student debt crisis deepens amid economic recession, more student borrowers will be at risk. ISAs are unlikely to escape scrutiny.

If ISA lenders continue to assert that the law doesn’t apply to them, student borrowers will continue to be at risk. If they continue to issue credit without TILA disclosures, impose prepayment penalties proscribed by TILA, engage in potentially discriminatory lending practices, and make misleading advertising claims, government enforcers should crack down with all available remedies—including rescission of contracts and restitution—and civil money penalties of up to $5,883 to $1,176,638 per day.

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Tune in tomorrow, July 22nd at 1:00 PM ET/10:00 AM PT, to our virtual conference on Income Share Agreements. Tune in here: https://www.emergingrisks.org/

Joanna Pearl is the former Enforcement Chief of Staff and Acting Principal Deputy Enforcement Director for the Consumer Financial Protection Bureau. She most recently served as Chief Operating Officer at Public Rights Project, a nonpartisan nonprofit that empowers state, local, and tribal governments to fight for civil rights and economic and environmental justice for their communities.

Brian Shearer is the Legal Director of Justice Catalyst Law, a nonprofit that advances social and economic justice through litigation against private actors. Brian previously worked for the Consumer Financial Protection Bureau in the Office of Supervision Policy, and he started the CFPB’s student loan servicing supervision program.