- Income share agreements (ISAs) are an alternative form of student-loan financing.
- The CFPB found that one ISA provider misrepresented its product by saying it wasn’t giving out loans.
- The CFPB said this misled borrowers and evaded consumer law by failing to disclose proper information.
The Consumer Financial Protection Bureau (CFPB) is cracking down on a company that finances an alternative type of student-loans over findings of misleading borrowers and evading federal consumer law.
Income share agreements (ISAs) finance student loans by requiring a borrower to pledge a certain portion of their income to the lender in exchange for money to pay for college. But the CFPB released a consent order on Tuesday that found one ISA provider — Better Future Forward — misrepresented its product by saying the money they were giving borrowers was not a loan and therefore not affected by consumer protection law.
“The ISA industry has tried to evade oversight by claiming that its products are not loans,” CFPB Acting Director Dave Uejio said in a statement. “But regardless of the name on the label, these products are credit and have to comply with federal consumer protections. The ISA industry cannot pretend that core consumer protection laws do not apply to their products.”
According to the CFPB, the company did not provide the right disclosures to borrowers for private education loans as required by law, causing unfair debt collection. The order requires the company to stop stating that ISAs are not loans, provide the proper disclosures as required by the law, not object to a borrower’s discharge of their ISA into bankruptcy, and not impose a prepayment penalty on the loan.
Better Future Forward CEO Kevin James released a statement in response to the CFPB’s consent order and said the company has “been a leader in advocating for policymakers to adopt clear and protective guardrails for the emerging ISA space.”
“While there has been uncertainty about the application of the existing federal loan disclosure regime to risk-sharing tools like ISAs, we believe CFPB’s oversight role is critical and are eager to work with the Bureau to bring clarity to these questions around how federal disclosures should apply to BFF’s ISAs,” James added.
Advocates have been holding ISAs under scrutiny for engaging in practices that mislead borrowers, causing them to take on debt without proper information. Following the CFPB’s order, the Student Borrower Protection Center said in a statement that “no private student lender is above the law.”
“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,” it said.
The nonprofit was referring to investigations it conducted that found ISAs have charged students of color more for the same product, and they made their products look cheaper than they really were. California recently reached a deal with an ISA company to increase oversight and protect borrowers.