On August 5, California’s Department of Financial Protection and Innovation (DFPI) announced that it entered into a consent order with a New York-based FinTech company that offers student Income Share Agreements (ISAs) to finance post-secondary education and training. According to the DFPI, it is the first agreement to subject an ISA provider to state licensing and regulation. The agreement reflects the DFPI’s decision to treat these private financing products as student loans for the purpose of the California Student Loan Servicing Act (SLSA). Below are significant highlights from the agreement:
- The DFPI found that the SLSA defines “student loans” broadly to include “any loan” or “extension of credit” and does not exclude contingent debt.
- Under the ISAs, students agree to repay a school a fixed percentage of their future gross income after graduation, but only if the student is employed and making more than an agreed-upon amount.
- The settlement provides that the DFPI will issue the company a conditional license under the SLSA based on its finding that ISAs are “student loans” for the purposes of the SLSA.
Putting It Into Practice: Classifying ISAs as student loans likely signals a watershed moment for the student loan industry. In fact, the settlement likely sets the stage for the DFPI to clarify requirements for ISA providers and servicers through future rulemaking.
Not to be lost by this action, however, are the parallels to other cash advance products. Courts, regulatory agencies, and the plaintiffs’ bar have, in a number of recent instances, cast cash advance products as the equivalent of lending products that carry usurious interest rates and violate state and federal prohibitions against unfair and deceptive acts and practices, among other laws. Merchant cash advance transactions, pension advances, and litigation funding advances, among others, bear similar transactional elements and risks to funding companies as ISAs because, in part, all of these transactions include contingencies such that the funders may receive no return on their investments if future events fail to materialize, e.g., a student under an ISA fails to secure sufficiently gainful employment in the future. Nonetheless, such advance products have been characterized as loans notwithstanding their conditional nature. Earlier this year, for instance, the California regulator entered into agreements with a number of unlicensed earned wage access companies that effectively brought them under the supervision of the regulator.
In the end, while California’s regulatory landscape continues to expand and change, persons providing ISAs and other cash advance products may wish to restructure their product offerings or consider – as this particular ISA provider did – seeking appropriate licensure.