CFPB Takes Action Against Firm Offering Alternative Financing for College; Some CUs Had Explored Similar Product Offering

Credit unions: We wanted to make you aware of a consent order from the Consumer Financial Protection Bureau regarding actions taken against Better Future Forward, Inc., an income share agreement (ISA) provider. ISAs offer students tuition dollars in exchange for a percentage of their post-graduation income. Critics say the product is a form of credit that has avoided necessary regulation.

Some financial institutions have explored partnerships with ISA providers. The Filene Institute even tested ISA products within the credit union sphere.

State authorities in California struck a deal with a fintech firm last month to treat its ISAs as student loans, requiring compliance with the state’s student borrower protection laws.

The voluntary agreement announced between Meratas, a New York-based ISA provider, and the California Department of Financial Protection and Innovation was hailed by state officials as “groundbreaking.”

In April, consumer groups led by the Student Borrower Protection Center urged the Office of the Comptroller of the Currency to scrutinize the first-of-its-kind arrangement between Virginia-based Blue Ridge Bank of Martinsville and MentorWorks Education Capital. The bank funds financing packages developed by MentorWorks.

Critics say banks could face reputational risks from working with a sector that is increasingly targeted for alleged consumer protection abuses, such as requiring expensive prepayment penalties, which some experts argue is illegal under the Truth in Lending Act. They worry that FIs could lend false credibility to a product that has avoided regulatory scrutiny, similar to criticism of partnerships between banks and other nonbanks such as small-dollar lenders.