New Disclosures for Income-Share Agreements

Nearly a year after the Consumer Financial Protection Bureau took action against a nonprofit provider of income-share agreements, the industry now has a better sense of how to comply with federal disclosure regulations, ISA providers and advocates say.

The guidance comes in the form of a compliance plan finalized recently between the bureau and Better Future Forward Inc., a nonprofit that provides income-share agreements to help historically marginalized students pay for some form of postsecondary training.

ISAs are essentially contracts in which companies or colleges provide money up front to pay for postsecondary education, and then the borrower pays the money back after completing a program, using a percentage of their postgraduate income. The industry was initially focused on technical training programs and boot camps. Critics have said ISA programs can potentially be a predatory form of financial aid.

The industry was largely unregulated until the bureau issued a consent order against Better Future Forward in September 2021—an action that clarified that income-share agreements were student loans. The bureau said the nonprofit misrepresented its product by saying that the ISAs weren’t loans and didn’t create debt, among other violations. As part of the consent order, the company was required to submit a compliance plan to the bureau, which was finalized in September. The bureau agreed in the consent order not to object to that plan but will continue to supervise the organization to ensure compliance.

The U.S. Department of Education echoed the bureau’s opinion in March when it clarified that ISAs were private education loans. Some ISA providers have argued that they are not loans.

Since the consent order, Kevin James, founder and chief executive officer of Better Future Forward, said the nonprofit and the overall ISA industry needed guidance on how to comply with the federal Truth in Lending Act, especially the disclosure requirements.

Because ISAs are considered private education loans, providers are required to disclose to borrowers related fees and charges, including the annual percentage rate, which is a measure of the cost of credit and the amount of money received and timing of payments. While drafting the compliance plan, Better Future Forward worked with the bureau on a disclosure form, James said. Better Future Forward also has released those forms publicly in a bid to help other providers and policy makers.

“I know there are so many other ISA providers who have been struggling with this question. This at least gives them something to look to, even if it’s not official,” James said. “This compliance plan just covers us, but it does give indications to the rest of the space about how the bureau was thinking about this.”

Ethan Pollack, director of the Financing the Future Initiative of JFF, which advocates for the use of some ISAs in higher education, said that the compliance plan only technically applies to Better Future Forward and doesn’t provide all the regulatory clarity sought. That clarity could come from changes to federal law. A bipartisan group of federal lawmakers proposed a bill over the summer to create a separate regulatory system geared toward ISAs, along with new guardrails to protect borrowers.

Disclosure “is one of the big open questions, and it’s the first time the CFPB is offered any type of guidance on what to look for, so that’s why I do think it is a significant development,” Pollack said.

Pollack, who sees broader implications for the industry in the compliance plan, is hoping that the compliance plan and the additional clarity about what ISAs lowers the temperature of the discourse about the industry.

“It goes from being this image of this rugged industry that’s, like, not trying to comply with the law—which I don’t think was ever true. But going from that to just being much more mundane, where there’s a new product out there, and they’re working with regulators to try to figure out how the law should apply to them,” Pollack said.

He said that the lack of regulatory clarity has held back the industry, and the compliance plan could lead to an expansion of the industry. While some companies and universities have been winding their ISA programs, Stanford Law School launched a pilot program earlier this fall.

The consent order was the result of an individual investigation into Better Future Forward and is not something that can be broadly applied to the ISA industry. Additionally, the bureau doesn’t validate or sign off on consumer financial products. Some advocates have interpreted the compliance plan as a validation of ISAs.

Ben Kaufman, director of research and investigations at the Student Borrower Protection Center, said the bureau’s 2021 action with Better Future Forward was an important step in stating that ISAs are loans, but some providers have continued to assert that their ISAs aren’t loans. With the disclosure form, he was skeptical that providers would even use it.

“My biggest takeaway is that as with everything with ISAs, these people continue to delude themselves and to assert incorrectly that what they’re doing is revolutionary when it’s just another kind of student loan,” Kaufman said.

In his view, the bureau “held the industry’s hands” to chart a path forward after the consent order.

“The thing I’ve learned is apparently I can’t stop these people from doing this,” he said of the ISA providers. “All I can do is continue pointing to the various ways that people are harmed by these products. The bureau has finished this exercise. To my knowledge, they don’t intend to, with any kind of broad brush, eliminate ISAs.”