In an effort to clarify the regulatory framework applicable to new education financing methods such as Income Share Agreements (“ISAs”), installment payment plans and other alternative financing methods, the California Department of Financial Protection and Innovation has proposed to amend its regulations relating to the licensure of student loan servicers and to proper resolution of borrower disputes. Comments on the proposed regulations are due by October 28, 2022.
The proposed regulations add several new definitions:
- “Education financing products” means “all private student loans which are not traditional student loans, including but not limited to income share agreements and installment contracts.”
- “Income share agreement” means an “agreement between a student and a school or an income share provider under which the student agrees to pay a fixed percentage of the student’s future income for the payment term, in exchange for waiving or covering the cost of some or all of the student’s tuition.”
- “Installment contract” means “a private student loan from a postsecondary institution to a student in which the student agrees to repay the amount advanced in a fixed number of payments of a fixed amount, including an education installment contract and a retail installment contract.”
- “Traditional student loan” means “federal student loans and private student loans offered by traditional lenders such as banks and credit unions.”
The proposed regulations generally apply the existing requirements for private student loan providers to all education financing products, including licensing and borrower dispute resolution requirements, with a few exceptions. Specifically, providers of education financing products (including ISAs and installment contracts) are subject to different reporting and recordkeeping requirements than providers of traditional student loans, which appropriately accounts for the differences between those products.
While the additional clarity regarding ISAs and installment plans is helpful, the proposed definitions appear insufficient to account for the range of education financing products currently available. For example, none of the definitions appear to apply to financing agreements in which a student’s monthly payment is a fixed dollar amount but will vary based on the borrower’s income range. Such a financing agreement is likely not a “traditional loan” or “installment contract” because the monthly payment may vary based on the borrower’s income, while the definition of an ISA would seem not to apply because the monthly payment is not a “fixed percentage of . . . income.” Likewise, there is ambiguity in the definition of a “traditional student loan,” specifically as to whether the term “traditional lender” includes only banks and credit unions or non-depository institutions as well.
For more information, please contact any of the authors or the Manatt professional with whom you work.