IIf you thought it was only small businesses selling their future earnings for cash, then you haven’t paid attention to the student loan industry.
More than five years ago, fintech companies channeled the MCA concept into student loans. Called revenue sharing agreement, it works as you would expect, the funder advances the tuition fees to the student and in return the student pays a fixed percentage of their gross income after graduation, but only if he is gainfully employed. They are not loans and there is no penalty if the amount repaid to the funder is less than the amount financed. It is basically an MCA for middle schoolers.
When deBanked interviewed a student named Paul Laurara about two years ago, Laurara said that in exchange for tuition money, he agreed to pay 2.57% of his earnings for 7 years, that he won a lot, a little or nothing at all. The funder bets that they will get a considerable return on investment, but takes the risk of getting nothing if the graduate does not work during this period or earns less than expected.
Laurara compared paying this way to what her friend faced, which was paying $230,000 in cash or student loans to attend NYU.
“ISAs” usually have the regulatory advantage of not being a loan, but that could change everything.
In California, the state’s Department of Financial Protection and Innovation challenged a lender’s ISAs when it applied for a student loan servicing license, a state requirement. This funder was called Meratas, a New York company headquartered in Connecticut. Meratas’ meeting with the Californian DFPI resulted in a consent order on August 5, ISAs in the company will be treated as students ready and make Meratas a licensed student loan agent.
“[This] the action shows that we are taking important steps to better protect California student borrowers,” said the DFPI Senior Deputy Commissioner. Suzanne Martindale, whose Consumer Financial Protection Division oversees the Student Loan Servicing Act. “Regulating revenue-sharing agreements like student loans levels the playing field and creates a fair market that protects all consumers.”
Although the agreement only applies to Meratas, it could set a precedent for the treatment of ISAs in the state.
Meratas celebrated the arrangement as a victory.
“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,” says Meratas founder and CEO Darius Goldman. “We are pleased to work with the DFPI in its efforts to develop ISA-specific regulations for the benefit of all industry participants. Our partners take comfort in knowing that Meratas continues to be the leader in responsible and user-friendly ISA programs.
Last modification : August 24, 2021