State authorities in California struck a deal with a fintech firm to treat a controversial finance product known as income-share agreements as student loans, requiring compliance with the state’s student borrower protection laws.
The voluntary agreement announced Thursday between Meratas, a New York-based ISA provider, and the California Department of Financial Protection and Innovation was hailed by state officials as “groundbreaking.” ISAs offer students tuition dollars in exchange for a percentage of their post-graduation income. But critics say the product is a form of credit that has avoided necessary regulation.
In order for Meratas to be approved for a state license, the company agreed to have state regulators treat its ISAs as student loans as defined by the California Student Loan Servicing Act.
Being subject to the law “better protects California students by ensuring the company submits to regular examinations and communicates honestly and fairly with borrowers, amongst many other protections,” according to a press release issued by DFPI.
Darius Goldman, founder and CEO of Meratas, said his firm welcomed the oversight and potential for regulatory clarity in the broader ISA sector.
"Because income share agreements do not fit neatly into existing federal or state legal regimes, we felt it prudent to be proactive at the state level, starting with California," Goldman said. "We are excited to work with the DFPI in its efforts to craft ISA-specific regulations for the benefit of all industry participants."
The ISA industry has argued for years that the product is not technically a form of credit and should not be subject to the same regulations as other loans. But consumer advocates have increasingly criticized parts of the sector for trapping some students in high-cost debt, even as some banks have begun to
“Today’s action shows we are taking significant steps to better protect California student borrowers,” said California DFPI Senior Deputy Commissioner Suzanne Martindale in the release. “Regulating income share agreements like student loans levels the playing field and creates a fair marketplace that protects all consumers.”
State regulators relied on California’s broad statutory definition of “student loans” to argue ISAs should be covered by the law.
“As a licensing and remedial statute, the [Student Loan Servicing Act] should be construed broadly to effectuate its purposes,” the text of agreement says. “A ‘student loan’ under the SLSA is credit that is extended ‘solely for use to finance a postsecondary education.’”
The press release suggested that California financial authorities may soon issue more rules and regulations for the ISA industry.
“For years, some ISA issuers have contended that state and federal lending laws are inapplicable to ISAs, and students who finance education under ISAs did not enjoy the same regulatory protections as other borrowers,” the release said. “The DFPI expects to clarify requirements for ISA providers and servicers through future rulemaking.”
