California to Regulate Alternative Student Loans in ‘Landmark Agreement’

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California’s leading consumer watchdog has signed a deal with a company offering alternative student loans to increase oversight of increasingly popular revenue sharing agreements (ISAs), Yahoo Finance has learned.

The Department of Financial Protection and Innovation (DFPI) has entered into a “landmark deal” with New York-based Meratas, Inc., a software platform that allows schools to issue ISAs.

“Today’s action shows that we are taking important steps to better protect California student borrowers,” said DFPI Senior Deputy Commissioner Suzanne Martindale. “Regulating revenue sharing agreements like student loans level the playing field and create a fair market 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 depend on various factors such as their primary subject of study and projected future income.

“Because revenue sharing agreements do not fit neatly into existing federal or state legal regimes, we felt it was prudent to be proactive at the state level, starting with California,” said Meratas founder and CEO Darius Goldman. “We are delighted to be working with DFPI in its efforts to develop ISA-specific regulations for the benefit of all industry participants. “

The agreement allows the DFPI to license and regulate Meratas, which means the company will undergo regular reviews by the agency to ensure that the ISA company “communicates honestly and fairly with borrowers, among other protections. “.

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

Student loan ‘the shell game is over’

Lawyers previously sounded the alarm on the growing number of ISA providers who have presented themselves as an alternative to traditional student loans, arguing that many of the products on offer circumvent consumer protection laws and engage in deceptive practices.

“Across the country, schools and financial firms like Meratas have tricked students into taking huge debt to pay for their education by pretending to offer something other than a student loan,” said Mike Pierce, director of policy at Student Borrower Protection Center and former regulator. for the student loan industry at the Consumer Financial Protection Bureau, Yahoo Finance said. “Today’s action by California regulators is a clear sign that this industry’s shell game is over – regulators will stand up for students and businesses will have to follow the law.”

ISA companies have previously claimed that their product is not a “loan” or “credit” but rather a “conditional debt” since a student does not have to pay the ISA until he finds it. a job.

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

DFPI is keen to regulate new fintech products: in January, the consumer protection agency signed a data sharing agreement with several fintech companies in the area of ​​cash advances to increase visibility of how these products affected consumers and the way fees were collected.

Both measures aim not only to research how infant industries affect consumers, but also to closely monitor business behavior.

Aarthi is a reporter for Yahoo Finance covering student debt and higher education. If you have entered into a revenue sharing agreement for your bachelor’s or master’s degree and would like to talk about your experience, contact her at [email protected]

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