WASHINGTON — A Consumer Financial Protection Bureau order against a provider of income-share agreements signals regulatory tightening for all ISAs, but could also give the education finance sector legal clarity, observers said.
ISAs offer tuition money in exchange for some of a student's future income. While many see the product as a progressive alternative to traditional student loans, consumer advocates say some have
The CFPB agreed with consumer groups, saying in a consent order that Better Future Forward, a Virginia-based nonprofit, misled consumers by attesting that its products
Some worry the CFPB's approach could be stifling before ISAs have a chance to mature, especially if the bureau asserts more authority over the sector. But several ISA proponents say the guidelines outlined in the Better Future Forward consent order lend more regulatory certainty.
“There’s a little more downside risk now, but there’s also more upside potential as well,” said Ethan Pollack, a program director at the nonprofit Jobs for the Future.
“With the CFPB declaring jurisdiction over ISAs, at least with regard to [the Truth in Lending Act], certainly, there’s a question of how they’re going to use that power, and I think that there is some cause for concern,” Pollack said. “But also, if they use that power wisely and in a way that is aligned with consumer interests, then I think you could achieve a lot greater regulatory clarity.”
Others have doubts that the CFPB’s involvement will benefit the industry.
“There is certainty in the sense that the CFPB has announced they believe ISAs are credit,” said Jonathan S. Joshua, special counsel at Manatt who has worked with ISA providers. “However, it is still unclear what to do with that information.”
Organizations will need to assess whether they can continue to offer the same type of ISA products under the CFPB's guidance or need to alter their approach, Joshua said.
“Does that just mean that ISAs are not viable? If an ISA is just credit, does that make it a loan that's income-based, and if so, how does one offer that?” he said. “Those are the questions ISA providers should continue to seek clarity on.”
The CFPB’s consent order focused largely on requiring disclosures that must accompany credit products under federal law, such as those in the Truth in Lending Act and Regulation Z.
In a statement, a CFPB spokesperson said that "ISAs are extensions of credit, specifically private education loans, under federal consumer financial law, and are thus subject to federal laws, regulations, and consumer protections."
"Consumers must not be deprived of their protections because a company offers a novel credit product that it characterizes as not credit," the spokesperson added.
But some analysts said that beyond the letter of the law, the consent order had little to say about how such protections should be implemented.
The foundation of the Truth in Lending Act, passed in 1968, is the requirement that lenders clearly disclose the costs of their credit product in the form of an annual percentage rate, or APR. But ISA providers have argued that the classic calculation for APR doesn’t work for a product with payments ultimately tied to an unknown figure: a borrower’s post-education income.
The consent order “doesn't stop [Better Future Forward] from offering ISAs, nor does it provide any of the important public information on how any other ISA providers should comply to ensure they are acting in good faith and in line with the CFPB’s criteria for what an ISA should look like going forward,” Joshua said. “To simply say, 'Well, comply with the Truth in Lending Act,' is not helpful in that regard.”
Others expressed doubts the enforcement action is a death knell for ISA providers.
“I don't think this is the end of ISAs. It's just one more development that's hopefully going to ultimately lead to a clearer regulatory framework,” said Heather S. Klein, an associate at Ballard Spahr who has worked with ISA providers and servicers.
But she stressed that regulators still need to provide more formal rules of the road.
“I don't think that the consent order gives us that clarity,” Klein said. “There's going to have to be a lot of ongoing dialogue between the industry and regulators to implement the aims of the consent order in a common-sense way.”
Without a robust explanation of the types of disclosures that ISA providers must present to a borrower, Klein said the industry may approach the task in disparate ways.
“A consumer advocate would read the consent order and say, 'OK, well, now every ISA provider has to include APRs in their disclosures,' ” Klein said. “But when you think about how that works in practice, absent clarity from the regulators, there's going to be a lot of variation in how the industry implements that supposed directive, and it might not result in the kind of clarity that would actually be productive.”
Still, others maintain that any legal nod toward ISAs from the federal government is better than regulatory silence.
"Given the current lay of the land, any guidance is better than what existed before," said a financial services professional who has worked with ISA providers. "The good actors, so to speak, are advantaged when there is some guidance, and they're in the best position to conform to better-established rules of the road."
Much of the ISA industry has argued their product should not be regulated like other forms of lending because of distinct structural differences in the product. For example, repayment is based on a set percentage of a borrower’s post-education income, rather than an annual interest rate.
But consumer advocates and even some
"For too long, ISA companies and their backers have tried to play fast and loose with basic consumer protections,” said Mike Pierce, policy director and managing counsel at the Student Borrower Protection Center. “The news that top regulators are paying closer attention should be a wake-up call to banks, and anyone else considering partnering with these companies.”
In April, several consumer groups led by the Student Borrower Protection Center
Some analysts say that the scrutiny from federal regulators should give any bank pause about becoming involved with an ISA product.
“If you're a bank and you're offering certain products, whether in your name or in a partnership with somebody else, that's fair game for the regulators to look at,” said Linda Jun, senior policy counsel with the Americans for Financial Reform.
The Student Borrower Protection Center has
But others said that the momentum toward legal clarity may be a boon for bank involvement in the long term.
“I don't think that banks should see this and hightail in the opposite direction,” Pollack said, pointing out that the CFPB did not ban Better Future Forward from issuing ISAs or even hit the firm with a financial penalty.
“I don't think that there's anything here that says, ‘Oh my god, like the sky is falling,’ ” Pollack added. “It seemed like [the CFPB] could have gone a lot harder on BFF, if they wanted to, and they didn’t. That suggests to me that they are trying to maybe make this work, as opposed to shutting everything down.”
