Last month, we wrote a blog about a consent order the California Department of Financial Protection and Innovation (DFPI) made with a manager of revenue sharing agreements. The DFPI has determined that, despite the provider’s claims to the contrary, the revenue sharing agreements are student loans that subject the provider to California licensing requirements. The CFPB was quick to enter the fray. On September 7, the CFPB entered into a consent order with Better Future Forward, Inc. and various affiliates (collectively BFF) in which the CFPB determined that the company:
Engaged in deceptive acts and practices regarding the fact that their revenue sharing agreements are student loans;
Failed to make the disclosures required by the Loan Truth Act and Regulation Z for creditors in general and for originators of private education loans;
Imposed prepayment penalties on private education loans through its use of a “payment cap” mechanism, in violation of the Truth in Lending Act; and
Has offered or provided a financial product or service to consumers that does not comply with the Federal Consumer Finance Act.
BFF argued that its product was not a loan, because if certain conditions were not met (including the student’s future income exceeding an expected threshold), the student was not obligated to repay the amount received from BFF. The CFPB rejected this position, stating that BFF’s revenue-sharing agreements “are credits under the [Consumer Financial Protection Act] because they give consumers the right “to defer payment of a debt, to incur a debt and defer payment thereof, or to purchase goods or services and to defer payment for such a purchase “. 12 USC § 5481 (7).
Put into practice : As we pointed out in our previous blog, and we repeat it now, so as not to be lost by this action (or the previous DFPI action), there are however parallels with other cash advance products. . Courts, regulators and the plaintiff’s bar have, in a number of recent cases, presented cash advance products as the equivalent of loan products that carry usurious interest rates and violate prohibitions. state and federal law against unfair and deceptive acts and practices, among other laws. Merchant cash advance transactions, retirement advances, and litigation finance advances, among others, have similar transactional elements and risks to finance companies as revenue sharing arrangements because, in part, all of these transactions include contingencies such that backers may not receive any return on their investments if future events do not materialize, for example, a student under an ISA fails to secure a sufficiently paying job at the future. However, these advance products have been qualified as loans despite their conditional nature.
Although the CFPB Consent Order focuses on a student loan provider, providers of the above mentioned types of programs or other similar programs may need to consider what program adjustments may be necessary to avoid end up on the CFPB radar.
Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.Revue nationale de droit, volume XI, number 253