California's top consumer watchdog signs deal with alternative student loans

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California's top consumer watchdog signs deal with alternative student loans

California's top consumer watchdog has signed a deal with an organization offering alternative student loans to increase oversight over increasingly popular income-share agreements Yahoo Finance learned.

The Department of Financial Protection and Innovation entered into a landmark deal with New York-based Meratas, Inc. : a software platform that allows schools to issue an ISA.

Today's action shows we are taking significant steps to better protect California student borrowers, DFPI Senior Deputy Commissioner Suzanne Martindale stated. Regulating income share agreements like student loans levels the playing field and creates a fair marketplace that protects all consumers.

ISAs are an alternative type of loan financing where a borrower gets and loan and then pays a percentage of their income after graduation. The work of an ISA depends on various factors such as proposed interest topic and major earnings projections.

'Because the income share agreements do not fit neatly into existing federal or state legal regimes, we felt it prudent to start at the local level, starting with California, Meratas founder and CEO Darius Goldman stated. We are excited to work with the DFPI in its efforts to craft ISA-specific regulations for the benefit of all industry participants.

The agreement allows the DFPI to license and regulate Meratas, meaning that the company will submit to regular examinations by the agency to make sure that the ISA firm communicates effectively and fairly with borrowers, amongst many other protections.

Advocates previously sounded the alarm over the growing number of ISA providers who presented themselves as an alternative to traditional student loans, arguing that many products offered skirt consumer protection laws and engage in deceptive practices.

Across the country, schools and finance companies like Meratas tricked students into taking on huge debts to pay for college by pretending they offer something other than a student loan, Mike Pierce told Yahoo Finance. Today's action by California regulators is a clear sign that this industry's shell game has come to an end - regulators will stand up for students and companies will be expected to follow the law.

ISA companies have claimed prior to that their product was not a loan or a credit, but rather contingent debt since a student doesn't have to pay the ISA until they find a job.

California classifies ISAs as student loans under the California Student Loan Servicing Act. The new deal occurred after Meratas applied in April to Apply for Licenses. The company was founded in 2005 and has a total of about 217 employees.

The DFPI is keen on regulating new fintech products: In January the consumer agency signed a data-sharing deal with several fintech companies in cash advance space to increase visibility of how those products affect consumers and how fees are being collected.

Both moves are meant to not only follow how nascent industries affect consumers, but also keep a close watch on the companies behavior as well.