The New Jersey Attorney General (NJAG) and the Federal Trade Commission (FTC) recently announced settlements in concurrent actions against Sollers College, a for-profit college, its parent company, Sollers, Inc., and, in the case of the NJAG action, its owner, Siba Padhi  (collectively, “Sollers”), resolving allegations that Sollers lured consumers to enroll by inflating its job placement rates and falsely representing that its relationships with prominent employers would create jobs for its graduates.  The NJAG and FTC also alleged that Sollers encouraged students to pay for their educations using income share agreements (“ISAs”) that were not in compliance with FTC rules.  The ISAs were used by students to finance their educations by agreeing to pay the school a share of their future income.  Under the two settlements, Sollers will cancel $3.4 million in ISAs for approximately 400 students and, under the NJAG settlement, it will also pay an additional $1.205 million civil penalty.

Sollers, which provides courses at a single campus in New Jersey as well as online, primarily offers short-term certificate programs in information technology and life sciences.  Sollers generally charges consumers tuition ranging from $4,000 to $27,000, depending on the program.  According to the FTC’s complaint, since at least 2018, Sollers has represented that the vast majority of its graduates are placed in jobs within 3 months of graduation, claiming in a Facebook ad, for example, that it has an “82% placement” rate.  Similar representations were made on its website and in other social media advertising.  The NJAG and FTC allege that there is no reasonable basis for this placement rate, and that it includes any student who does not communicate with Sollers after graduating.  Sollers, according to the complaints, does not generally track employment start dates for its students, so it lacks this information.

The NJAG and FTC further allege that Sollers misrepresents that its partnerships with leading businesses result in jobs for its graduates.  The school prominently features corporate logos of companies it claims hire its students, even though Sollers purportedly lacks partnerships with many of them and has even received cease-and-desist letters from at least one of them.

According to the NJAG and FTC, Sollers encouraged students to pay for their educations through ISAs, with fixed percentages for repayment ranging from between 10% to 20% of a student’s monthly earned income, typically for a period of two years.  Under the terms of the ISAs, a student’s failure to comply triggers a lump-sum payment obligation, generally around $45,000.  Although not discussed in either complaint, Sollers’ ISA apparently required students to be earning $50,000 per year before they would have any repayment obligation. (See Exhibit 12 to the FTC Complaint.)  According to the FTC’s complaint, approximately 90% of students who entered into ISAs with Sollers are either in active repayment or have defaulted and owe a fixed amount.

The NJAG and FTC further allege that Sollers’ ISAs fail to include the legally required “Holder Rule” notice, which informs consumers of their right to assert claims and defenses against any holder of a consumer credit contract.  As a result of these factual assertions, the NJAG alleged violations of the New Jersey Consumer Fraud Act, N.J.S.A. §§ 56:8-1—56:8-227, and the New Jersey General Regulations Governing General Advertising, J.J.A.C. 13:45A-9.1—13:45A-9,8, and the FTC alleged unfair or deceptive acts and practices under Section 5(a) of the FTC Act, 15 U.S.C. § 45(a) and violations of the Holder Rule, 16 C.F.R. § 433.2(a).

Under the terms of the settlements (available here and here), Sollers is enjoined from collecting amounts owed to it under the ISAs, including “all unpaid fees and interest” related to the ISAs, even where ISAs were sold to a third party or debt collector.  It also must include the Holder Rule notice on all consumer credit contracts going forward and is prohibited from denying access to any certificate, diploma, or transcript on the basis of debt owed under the ISAs involved in the settlement.

Although the contingent nature of ISAs raises significant questions as to the merits of the positions taken by federal and state regulators, ISAs have been a focus of regulatory scrutiny by the FTC, CFPB, and state attorneys general.  For example, the CFPB views at least some ISAs as extensions of consumer credit under the Consumer Financial Protection Act (CFPA) and Truth in Lending Act (TILA), and as “private education loans” under TILA.  In September 2021, the Bureau issued a consent order to that effect against an ISA provider (Better Future Forward).  This past summer it joined with California Department of Financial Protection and Innovation (CA DFPI) and ten state attorneys general in filing a lawsuit against other ISA providers alleging that the companies violated the CFPA, TILA, and the Fair Debt Collection Practices Act (FDCPA).  Some states have also categorized educational ISAs as student loans (see, e.g. California DFPI’s agreement with Meratas, Inc. finding that ISAs made solely for the purpose of financing a postsecondary education are student loans under the California Student Loan Servicing Act).  We expect to see continued scrutiny of ISAs by both federal and state regulators.