Last week, the California Department of Financial Protection and Innovation (DFPI) announced that it had entered into “a landmark agreement” with Meratas, Inc., a company that acts as a program manager of Income Share Agreements (ISAs) used to finance postsecondary education and training. The agreement includes the DFPI’s finding that ISAs made solely for the purpose of financing a postsecondary education are “student loans” under the SLSA.
In April 2021, Meratas applied for a student loan servicer license under the CA Student Loan Servicing Act (SLSA). Pursuant to the agreement, the DFPI will issue a conditional SLSA license to Meratas with a one-year term. The agreement further provides that the DFPI will issue Meratas a regular, unconditional SLSA license following Meratas’s submission of audited financial statements in 2022. In the agreement, Meratas has agreed that while licensed under the SLSA, and until a change in applicable law or regulation, it will report to the DFPI any ISAs that it services as “student loans” for purposes of the SLSA.
The agreement serves as the vehicle for the DFPI to publicize its finding that “ISAs made solely for use to finance a postsecondary education are “student loans” for the purposes of the SLSA.” To reach this conclusion, the DFPI applied the California Consumer Financial Protection Law’s (CCFPL’s) broad definition of “credit,” which encompasses “contingent” obligations. We are continuing to monitor how the DFPI uses its CCFPL authority to regulate ISA originators and other financial services providers. Earlier this year, the DFPI initiated a rulemaking to solicit comments on these issues. Also earlier this year, the DFPI entered into a consent order with Lambda School to settle claims brought under the CCFPL.
As a result of the license approval, Meratas will be the first ISA program manager authorized by the DFPI to service ISAs in California. In commenting on the agreement, Meratas noted that because the legal status of ISAs is unclear under existing federal and state laws, the company determined it was prudent to be proactive at the state level, starting with California. Meratas expects to work with the DFPI in crafting ISA-specific regulations and, by doing so, the company hopes to take a leading role in collaborations between regulators and stakeholders in the ISA industry.