The Future of ISAs: Everything You Need to Know about the Consumer Financial Protection Bureau’s Consent Order
From the Social Finance Institute
From the Social Finance Institute
The Social Finance Institute, Economic Mobility, Education, Career Impact Bonds, Pay It Forward Funds
Income share agreements (ISAs) are education financing tools that link a student’s payment obligation to their success in a training program and their subsequent economic advancement.
Here at Social Finance, as part of our work to advance economic mobility, we develop student-friendly financing tools to help individuals upskill or reskill, including ISAs and loans. Our work focuses on meeting the needs of people who face barriers to education, like ineligibility for private loans or scholarships, poor credit history, justice system involvement, and immigration status. We aim to create the best outcomes for learners with consumer-friendly payment features like downside protection, which are outlined in a Student Bill of Rights.
Unlike traditional loans, ISAs are fairly new, and thus largely unregulated. In their clouded landscape, practitioners have used varied models, approaches, disclosures, and contracts to craft ISA programs. This flexibility has allowed for innovation in the ISA space, but it has also opened the door to questionable, even harmful practices and prevented broader uptake of this outcomes-based tool.
A year ago, the Consumer Financial Protection Bureau (CFPB) opened an investigation into Better Future Forward (BFF), a mission-driven, 501(c)(3) nonprofit that uses ISAs to enable low-income students to pursue post-secondary pathways in tandem with student support programs. The investigation was specifically focused on BFF and their third-party originated ISAs—not ISAs in general, BFF’s competitors, or any other aspect of the ISA landscape.
In September, the CFPB concluded its investigation with a consent order: BFF could, with slight changes to its contracts and continuing oversight, continue to originate ISAs. The mandated changes—that BFF stop charging prepayment penalties, stop claiming that ISAs are not loans, add mandatory loan disclosures to their agreements, and follow consumer loan laws such as the Truth in Lending Act and the Consumer Financial Protection Act—hinged on the CFPB’s conclusion that such third-party originated, direct to consumer ISAs are loans.
We are heartened to see that the CFPB finds no issue with the basic concept of an income share agreement, so long as that agreement is structured and implemented in a manner consistent with its guidance. In the CFPB’s eyes, a payment mechanism that links repayment obligations to a person’s success after training is valid.
Like any consent order, the CFPB’s order does not directly impact parties it does not target. However, it does signal to the broader ISA industry that BFF’s ISAs are allowable—so long as they are subject to the existing laws governing loans.
We are heartened to see that the CFPB finds no issue with the basic concept of an income share agreement, so long as that agreement is structured and implemented in a manner consistent with its guidance. In the CFPB’s eyes, a payment mechanism that links payment obligations to a person’s success after training is valid. This is clear, good news for the ISA field.
But the clarity stops there. The CFPB’s consent order, like all consent orders, narrowly addresses a single institution’s contracts—and the ISA ecosystem is incredibly varied. For example, some ISAs use fixed monthly payments, while others use a percentage-based structure; some ISAs are delivered through Title IV institutions (where the financing landscape is complex and multi-layered), while others are offered through nonprofit and for-profit training providers; and some ISAs are originated through training providers, while others are originated by third-party institutions (like BFF).
The CFPB’s order provides clear guidance for BFF’s ISAs, but we believe a more complete regulatory framework for ISAs is needed. Such a framework would benefit the field and, most importantly, the learners at the heart of it. The ISA market has the potential to drive educational attainment, economic mobility, and equity, but only if it is properly regulated.
Learn more about how ISAs work in Workforce Realigned: How New Partnerships are Advancing Economic Mobility, Chapter 14: “The Emergence of Income Share Agreements,” written by Dubravka Ritter, Advisor and Research Fellow at the Federal Reserve Bank of Philadelphia and Douglas Webber, Associate Professor of Economics at Temple University.