On April 17th, the CFPB issued a consent order to a for-profit training school alleging numerous violations of law related to its use if income share agreements (“ISAs”). According to the Bureau, BloomTech, Inc. (“BloomTech”) and the company’s founder and CEO engaged in deceptive and abusive acts or practices, violated the Truth in Lending Act (“TILA”) and Regulation Z, and violated the Federal Trade Commission’s (“FTC”) Holder Rule. This may be the first time the CFPB has cited a violation of the Holder Rule in an enforcement action.
BloomTech is a private vocational school that offers training programs to students in web development, data science, and backend engineering. According to the CFPB, these training courses are short-term programs that last six to nine months and cost between $20,000 and $30,000. BloomTech offered ISAs as a financing option whereby students agreed to pay a percentage of their income, so long as they had a qualifying job with an income of at least $50,000 after graduation. In total, BloomTech originated more than 11,000 ISAs.
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The CFPB’s order asserts that BloomTech made the following misrepresentations, which were deceptive and likely to mislead consumers:
- In connection with the ISAs, BloomTech represented that the ISAs were not loans or debt, carried no finance charge, and were risk-free. Advertisements included phrases such as “graduate risk-free” and “no loans, no debt.” However, according to the Bureau, the ISAs included a finance charge of $4,000 for students that completed repayment, and students that defaulted risked negative credit reporting;
- BloomTech advertised false or misleading job-placement statistics and placement at large corporations that rarely hired its students; and
- BloomTech advertised that the company would not be paid until the student was paid through a job-placement, but BloomTech was paid when it immediately sold the ISAs to investors.
In addition, the CFPB alleges that BloomTech engaged in abusive acts or practices because it took unreasonable advantage of students who relied on the representations related to job-placement, curriculum, instructors, and promised financial outcomes.
Holder Rule Violations
The CFPB asserts that BloomTech violated the FTC’s Holder Rule, as the ISAs failed to include the required notice. The CFPB can enforce the FTC’s Holder Rule under sections 1061(b)(5)(B)(ii) and 1063(i) of the Dodd Frank Act “with respect to an unfair or deceptive act or practice to the extent that such rule applies to a covered person or service provider with respect to the offering or provision of a consumer financial product or service.” The rule applies to sellers of goods or services who accept the proceeds of a purchase money loan or accept a consumer credit contract in connection with the sale of their goods or services and requires that a provision be included in the contract (even where such contract is not prepared by the seller) which provides that any holder of the contract is subject to all claims and defenses that could be asserted against the seller of goods or services. The consent order asserts that the ISAs are credit sales subject to the Holder Rule and that BloomTech violated the rule because the ISAs did not include the rule’s required contractual provision.
In October 2023, the FTC and New Jersey Attorney General announced a settlement against Sollers College, a for-profit college in New Jersey, for, among other things, failing to include the Holder Rule notice in its ISAs and for violating Section 5 of the FTC Act. Similar to BloomTech, Sollers College offered ISAs for students to finance their education in various private educational programs by agreeing to pay the for-profit college a share of their future income. In the Better Future Forward consent order, the CFPB concluded that an ISA is an extension of credit under the Consumer Financial Protection Act and TILA. This consent order serves as a reminder of the Bureau’s broad authority, including its authority to enforce certain FTC trade regulations.
TILA/Regulation Z Violations
The CFPB asserts that the ISAs failed to include required TILA disclosures, including the amount financed, the finance charge, and the annual percentage rate. Although the contingent nature of ISAs raises significant questions as to the merits of this position, the CFPB has viewed ISAs as extensions of consumer credit and “private education loans” under TILA in the past, as noted above. The CFPB has also joined with California Department of Financial Protection and Innovation (“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. For example, the California DFPI entered into an 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.
Under the terms of the consent order, BloomTech is permanently restrained from directly or indirectly engaging in any consumer lending activities. In addition, BloomTech must rescind certain ISAs, provide TILA disclosures, and return payments to consumers. The CFPB assessed a $64,235 civil money penalty against BloomTech, and a $100,000 civil money penalty against its CEO and owner.
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