On August 5, the California Department of Financial Protection and Innovation announced an agreement to issue a license to a New York-based company that partners with educational institutions to offer Income Share Agreements 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.”
This content originally appeared in the InfoBytes blog, a collection of news and alerts covering legal and regulatory developments for the financial services industry. To read more or have the InfoBytes weekly newsletter delivered to your inbox, please visit infobytesblog.com.