SACRAMENTO, Calif. – The California
Department of Financial Protection and Innovation (DFPI) today announced it had signed a landmark agreement with New York-based Meratas, Inc., a
company that partners with educational institutions to offer students
Income Share Agreements or ISAs to
finance post-secondary education and training.
The agreement reflects the
Department’s decision to treat these private financing products as student loans for the purpose of the California
Student Loan Servicing Act (SLSA). The move represents a significant first step toward providing greater oversight
of the ISA industry.
“Today’s action shows we are
taking significant steps to better protect California student borrowers,” said DFPI Senior Deputy Commissioner
Suzanne Martindale, whose Consumer Financial Protection Division oversees the student loan servicing law. “Regulating
income share agreements like student loans levels
the playing field and creates a fair marketplace that protects all consumers.”
The agreement between DFPI and
Meratas is believed to be the first of its kind to subject an ISA servicer to state licensing and
regulation. Regulating an ISA servicer under the SLSA better protects California students by ensuring the
company submits to regular examinations and communicates honestly and fairly
with borrowers, amongst
many other protections.
ISAs are increasingly used by
private, for-profit companies offering post-secondary education and nonprofit training programs. Under an ISA,
a student agrees to repay a school a fixed percentage of the student’s future gross income after
graduation, but only if the student is employed and making above an agreed-upon amount.
Meratas
voluntarily applied for a license in April of this year, which led to the
agreement. The agreement provides that the Department will issue the company a conditional license
under SLSA.
For years, 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. The DFPI expects to
clarify requirements for ISA providers and servicers through future rulemaking.
In addition to regulating student
loan servicers, the DFPI licenses and regulates financial products and services, including state-chartered banks
and credit unions, commodities and investment advisers, money transmitters, the offer and sale of securities and
franchises, broker-dealers, nonbank installment
lenders, payday lenders, mortgage lenders and servicers, escrow companies,
Property Assessed Clean Energy (PACE)
program administrators, debt collectors, rent-to-own contractors, credit repair
and consumer credit reporting
agencies, debt-relief companies, and more.
