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California moves to regulate alternative student loans through 'landmark agreement'

·3 min read

California's top consumer watchdog has signed a deal with a company providing alternative student loans to increase oversight over increasingly popular income-share agreements (ISAs), Yahoo Finance has learned.

The Department of Financial Protection and Innovation (DFPI) entered into a "landmark agreement" with New York-based Meratas, Inc., a software platform that enables schools to issue ISAs.

"Today's action shows we are taking significant steps to better protect California student borrowers," DFPI Senior Deputy Commissioner Suzanne Martindale stated. "Regulating income share agreements like student loans levels the playing field and creates a fair marketplace that protects all consumers.”

ISAs are an alternative type of student loan financing where a borrower receives a loan and then pays a percentage of their income after graduation. The terms of an ISA depends on various factors such as their major topic of study and projected future earnings.

“Because income share agreements do not fit neatly into existing federal or state legal regimes, we felt it prudent to be proactive at the state level, starting with California," Meratas Founder and CEO Darius Goldman stated. "We are excited to work with the DFPI in its efforts to craft ISA-specific regulations for the benefit of all industry participants."

The agreement allows the DFPI to license and regulate Meratas, meaning that the company will submit to to regular examinations by the agency to make sure that the ISA company "communicates honestly and fairly with borrowers, amongst many other protections."

Graduating UCLA students celebrate while walking the stage for their commencement ceremony at Drake Stadium on June 11, 2021 in Westwood, California. (Photo by Mario Tama/Getty Images)
Graduating UCLA students celebrate while walking the stage for their commencement ceremony at Drake Stadium on June 11, 2021 in Westwood, California. (Photo by Mario Tama/Getty Images)

Student loan 'shell game has come to an end'

Advocates previously sounded the alarm over the growing number of ISA providers who presented themselves as an alternative to traditional student loans, arguing that many of the products offered skirt consumer protection laws and engage in deceptive practices.

"Across the country, schools and finance companies like Meratas have tricked students into taking on huge debts to pay for college by pretending they offer something other than a student loan," Mike Pierce, policy director at the Student Borrower Protection Center and a former regulator for the student loan industry at the Consumer Financial Protection Bureau, told Yahoo Finance. "Today's action by California regulators is a clear sign that this industry's shell game has come to an end — regulators will stand up for students and companies will be expected to follow the law."

ISA companies have previously claimed that their product is not a "loan" or a "credit" but instead "contingent debt" since a student doesn't have to pay the ISA until they find a job.

California classifies ISAs as student loans under the California Student Loan Servicing (SLSA) Act. The new deal occurred after Meratas voluntarily applied for a license in April. 

The DFPI is keen on regulating new fintech products: In January, the consumer agency signed a data-sharing deal with several fintech companies in the cash advance space to increase visibility of how those products were affecting consumers and how fees are being collected. 

Both moves are meant to not only research how nascent industries affect consumers, but also keep a close watch on the companies' behavior as well. 

Aarthi is a reporter for Yahoo Finance covering student debt and higher education. If you are on an income share agreement for your bachelor’s or master’s degree and would like to talk about your experience, reach out to her at aarthi@yahoofinance.com.

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