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Financial Services Law Insights and Observations


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  • CFPB, states sue company over deceptive student lending and collection

    Federal Issues

    On July 13, the CFPB joined state attorneys general from Washington, Oregon, Delaware, Minnesota, Illinois, Wisconsin, Massachusetts, North Carolina, South Carolina, and Virginia in taking action against an education firm accused of engaging in deceptive marketing and unfair debt collection practices. California’s Department of Financial Protection and Innovation is participating in the action as well. Prior to filing for bankruptcy, the Delaware-based defendant operated a private, for-profit vocational training program for software sales representatives. The joint complaint, filed as an adversary proceeding in the firm’s bankruptcy case, alleges that the defendant charged consumers up to $30,000 for its programs. The complaint further alleges that the defendant encouraged consumers who could not pay upfront to enter into income share agreements, which required minimum payments equal to between 12.5 and 16 percent of their gross income for 4 to 8 years or until they had paid a total of $30,000, whichever came first.

    The complaint asserts that the defendant engaged in deceptive practices by misrepresenting its income share agreement as not a loan and not debt, and mislead borrowers into believing that no payments would need to be made until they received a job offer from a technology company with a minimum annual income of $60,000. The defendant is also accused of failing to disclose important financing terms, such as the amount financed, finance charges, and annual percentage rates, as required by TILA and Regulation Z. The complaint also claims that the defendant hired two debt collection companies to pursue collection activities on defaulted income share loans. One of the defendant debt collectors is accused of engaging in unfair practices by filing debt collection lawsuits in remote jurisdictions where consumers neither resided nor were physically present when the financing agreements were executed. The complaint further alleges the two defendant debt collectors violated the FDCPA and the CFPA by deceptively inducing consumers into settlement agreements and falsely claiming they owed more than they did.

    According to the Bureau and the states, after the Delaware Department of Justice and Delaware courts began scrutinizing the debt collection lawsuits, the defendant unilaterally changed the terms of its contracts with consumers to force them into arbitration even though none of them had agreed to arbitrate their claims. Additionally, the complaint contends that settlement agreements marketed as being “beneficial” to consumers actually released consumers’ claims against the defendant and converted income share loans into revised “settlement agreements” that obligated them to make recurring monthly payments for several years and contained burdensome dispute resolution and collection terms.

    The complaint seeks permanent injunctive relief, monetary relief, consumer redress, and civil money penalties. The CFPB and states are also seeking to void the income share loans.

    Federal Issues State Issues Courts State Attorney General State Regulators CFPB Consumer Finance Student Lending Debt Collection Income Share Agreements Deceptive Unfair UDAAP FDCPA CFPA TILA Regulation Z Enforcement

  • Bipartisan Senate legislation would offer stronger ISA protections

    Federal Issues

    On January 31, Senators Mark Warner (D-VA), Todd Young (R-IN), Marco Rubio (R-FL), and Chris Coons (D-DE) reintroduced legislation to strengthen protections for students who enter into income share agreements (ISAs). The senators explained that ISAs are an innovative way for students to finance postsecondary education and serve as an alternative to high-interest student loans. Under an ISA, students agree to pay a percentage of their income over an agreed upon time period in exchange for tuition payments from nongovernmental sources. When the time period ends, students stop payments regardless of whether they have paid back the full amount.

    The ISA Student Protection Act of 2023 would, among other things, (i) prevent ISA providers from requiring payments higher than 20 percent of a student’s income; (ii) exempt students from making payments towards their ISA should their income fall below an affordability threshold; (iii) establish a maximum number of payments and limit payment obligations to the end of a fixed window; (iv) set a minimum number of voluntary payment relief pauses; (v) require ISA providers to give detailed payment disclosures to students who may be considering entering into an ISA (including how payments under an ISA compare to payments under a comparable loan); (vi) provide strong bankruptcy protections for students who enter into an ISA “by omitting the higher ‘undue hardship’ standard for discharge required under private loans”; (vii) prevent funders from accelerating defaulted ISAs; (viii) ensure that ISA obligations end in the event of death or total and permanent disability; (ix) ensure that ISAs fall under federal consumer protection laws, including the FCRA, FDCPA, MLA, SCRA, and ECOA; (x) grant regulatory authority over ISAs to the CFPB; and (xi) clarify how ISA contributions should be treated for tax purposes for both funders and recipients.

    Federal Issues Federal Legislation Student Lending Consumer Finance Income Share Agreements U.S. Senate

  • DFPI modifies Student Loan Servicing Act proposal

    State Issues

    On January 6, the California Department of Financial Protection and Innovation issued modified proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) The initial proposed rules also (i) defined the term “education financing products” (which now fall under the purview of the Act) along with other related terms; (ii) amended various license application requirements, including financial requirements for startup applicants; (iii) outlined provisions related to non-licensee filing requirements (e.g., requirements for servicers that do not require a license but that are subject to the Student Loans: Borrower Rights Law, which was enacted in 2020 (effective January 1, 2021)); (iv) specified that servicers of all education financing products must submit annual aggregate student loan servicing reports to DFPI; and (v) outlined new clarifications to the Student Loans: Borrower Rights Law to provide new requirements for student loan servicers (covered by InfoBytes here).

    Following its consideration of public comments on the initial proposed rulemaking, DFPI is proposing the following changes:

    • Amendments to definitions. The modified regulations revise the definition of “education financing products” by changing “private loans” to “private education loans,” which are not traditional loans. DFPI explained that changing the term to what is used in TILA will provide consistency for servicers and eliminate operational burdens. While the definition of “education financing products” also no longer includes “income share agreements and installment contracts” in order to align it with TILA, both of these terms were separately defined in the initial proposed rulemaking. The definition of “traditional student loan” has also been revised to distinguish which private student loans are traditional loans and which are education financing products (in order to help servicers determine the applicable aggregate reporting and records maintenance rules). The modifications also revise the definitions of “federal student loan,” “income,” “income share agreement,” “installment contract,” “payment cap,” “payment term,” and “qualifying payments,” remove unnecessary alternative terms for “income share,” and add “maximum payments” as a new defined term.
    • Time zone requirement revisions. The modified regulations revise the time zone in which a payment must be received to be considered on-time to Pacific Time in order to protect California borrowers.
    • Additional borrower protections. The modified regulations specify that servicers are required to send written acknowledgement of receipt and responses to qualified written requests via a borrower’s preferred method of communication. For borrowers who do not specify a preferred method, servicers must send acknowledgments and responses through both postal mail to the last known address and to all email addresses on record.
    • Examinations, books, and records requirement updates. The modified regulations revise the information that servicers must provide in their aggregate reports for traditional student loans, including with respect to: (i) loan balance and status; (ii) cumulative balances and amounts paid; and (iii) aggregate information specific to ISAs, installment contracts, and other education financing products. Additionally, DFPI clarified that while the amount a borrower will be required to pay to an ISA provider in the future is unknown, many ISAs contain an “early completion” provision to allow a borrower to extinguish future obligations, and ISA providers must give this information to borrowers. DFPI further clarified that while servicers may choose to maintain records electronically, they must also be able to produce paper records for inspection at a DFPI-designated servicer location to allow an examination to be conducted in one place.

    Comments on the modified regulations are due January 26.

    State Issues Agency Rule-Making & Guidance DFPI Student Lending Student Loan Servicer Student Loan Servicing Act Licensing Income Share Agreements Installment Loans Consumer Finance California State Regulators TILA

  • DFPI grants license to ISA servicer

    On August 5, the California Department of Financial Protection and Innovation (DFPI) announced an agreement to issue a license to a New York-based company that partners with educational institutions to offer Income Share Agreements (ISAs) to students to finance their post-secondary education and training. The agreement reflects DFPI’s decision to “treat these private financing products as student loans” for purposes of the California Student Loan Servicing Act (SLSA)” and represents “a significant first step toward providing greater oversight of the ISA industry.” As previously covered by InfoBytes, in 2018, the California governor approved AB 38 to amend the state’s Student Loan Servicing Act, which provides for the licensure, regulation, and oversight of student loan servicers by the California Department of Business Oversight (now DFPI). The agreement is the first of its kind to subject an ISA servicer to state licensing and regulation. In the agreement, DFPI explains that the SLSA defines a “student loan” “by the purposes for which financing is used,” and includes an “extension of credit” that is “solely for use to finance post-secondary education.” The SLSA expressly excludes certain types of credit, but does not exclude contingent debt or ISAs. Therefore, the agreement concludes, “the Commissioner finds that ISAs made solely for use to finance a postsecondary education are ‘student loans’ for the purposes of the SLSA.”

    As part of the agreement, the company, among other things: (i) must submit all audited financial statements; (ii) must report any ISAs it services as “student loans” for purposes of the SLSA; and (iii) “shall not service any ISAs or other forms of credit extended to California consumers that have been determined or declared unenforceable or void by the DFPI or any regulatory agency that licenses, charters, registers, or otherwise approves the issuer of the ISA.” In addition, DFPI will issue the company a regular, unconditional California SLSA license “within 5 business days of the Commissioner’s approval of [the company’s] Audited Financials.” According to DFPI, “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,” and DFPI “expects to clarify requirements for ISA providers and servicers through future rulemaking.”

    Licensing State Issues DFPI Income Share Agreements Student Lending Student Loan Servicer

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