By: Christian Schweitzer

The runaway freight train that is the American student debt crisis continues to accelerate, as borrowers now owe a collective $1.73 trillion in debt.[1] As President Biden and Congress press forward with retroactive reforms to cancel debt for certain limited classes of borrowers,[2] it seems worthwhile to return to conversations about forward-looking reforms to minimize new debt. One potential guardrail to new student debt is the Income Share Agreement (“ISA”),[3] a financing product that serves as an alternative to student loans by offering students educational funding in exchange for the student’s promise to pay the lender a fixed portion of their future income for a set number of years.[4]

Though the principles that underlie ISAs arguably date back to human capital contracts envisioned by free marketeer Milton Friedman,[5] their proliferation into the realm of higher education is relatively recent. In 2002, a Chilean company called Lumni created a fund to invest in students pursuing higher education, with the expected returns to be an agreed percentage of the students’ future income for ten years following graduation.[6] Since then, Lumni and others have expanded to the United States, and the ISA model has been adopted by nonprofit, for-profit, and government entities.[7] While ISAs are increasing in popularity, data on the ISA education financing market share is lacking.[8] Analyzing the client base of Vemo,[9] a leading education finance intermediary, as a proxy, researchers estimate that in addition to private ISA funds, roughly sixty colleges in the U.S. offered ISA financing as of July 2019, up from eight colleges in 2017.[10]

Advocates for the expansion of ISAs see them as more than an alternative to student loans but offering a host of other benefits, including equality of opportunity, student protections, information transparency, innovation, and student support.[11] As a quintessentially free-market device, these experts argue that ISAs open the doors of higher education to students of all racial and financial backgrounds, without the need for federal subsidies.[12] Further, ISAs can be more student protective than traditional private loans, because the risk of low post-graduate income or unemployment is allocated to the lender.[13] Because ISAs carry such low risks to students, they may be attractive to debt-averse students for whom higher education would be otherwise inaccessible.[14] Additionally, ISAs incentivize lenders to offer academic and career support to students, because students who go on to be high earners present the greatest return on investment.[15] Lastly, competition between lenders should encourage innovation in the delivery of financing and education itself, as investors will be more willing to dedicate dollars towards more venerable education providers.[16]

As ISAs have grown in popularity, they have also been subjected to a great deal of scrutiny, including from student’s rights organizations.[17] The harshest of perspectives describes the ISA arrangement as a modern-day indentured servitude because they create the opportunity for a borrower’s repayment to be much more than the value of their education.[18] Indeed, there are legitimate moral concerns created by allowing private funds and corporations to effectively create ownership interests in aspiring young professionals.[19] Additionally, there are practical concerns that ISAs are ripe for unfairness due to opportunities presented for unethical conduct by both lenders and borrowers.[20] Borrower exploitation of the system may manifest as either adverse selection, opting into an ISA knowing privately they intend to earn less than declared in the application process, or as moral hazard, where a borrower does not work as hard for economic success because earning more will lead to paying more to the lender.[21] Lender exploitation could arise by drafting unfair terms for the rate or duration of repayment, as well as inequality in selecting groups who are most often approved for funding.[22] Lastly, critics note that additional risks for investors in ISAs could lead to repayment ultimately being more expensive for successful students than traditional student loans. [23]

Potential weaknesses aside, a nationally representative survey found that 46% of individuals support ISAs to only 22% who oppose them.[24] Given this support and the utility of ISAs, what can regulators do to mitigate their harms and protect borrowers? Some ISA researchers have recommended comprehensive drafting of new regulations which balance controls against likely borrower and lender abuses, in a manner that attempts to anticipate new loopholes lending contracts could include without curbing the innovation that makes ISAs desirable.[25] On the contrary, borrower advocates have argued that ISAs operate similarly to traditional credit agreements and thus can be governed by existing consumer financial protection regimes at the state and federal level, such as the Equal Credit Opportunity Act.[26] Still, others have called for analysis on a case-by-case basis, advocating for simply categorizing ISAs as analogous to a type of traditional transaction and then regulating it under existing regimes. [27]

ISAs are not a one-size-fits-all solution to ongoing student debt issues in the United States. However, they can be a tool in the swiss army knife of policymakers that contributes to meaningful progress. Especially for lower-income and risk-averse students, ISAs can provide a pathway to higher education that traditional student loans do not. For ISAs to be most effective, regulators must continue to work towards solutions that leave the door open to lending innovation, while cutting off avenues for predatory practices. With proper oversight, the broader implementation of ISA funding can be an important piece of next-generation education reform.


[1] Abigail Johnson Hess, The U.S. has a Record-breaking $1.73 Trillion in Student Debt—Borrowers from These States Owe the Most on Average, CNBC (Sept. 9, 2021, 1:03 PM), https://www.cnbc.com/2021/09/09/america-has-1point73-trillion-in-student-debtborrowers-from-these-states-owe-the-most.html.

[2] Zack Friedman, Biden has Cancelled $11.5 Billion of Student Loans, but Here’s What This Means for Student Loan Forgiveness, Forbes (Oct. 12, 2021, 8:30 AM), https://www.forbes.com/sites/zackfriedman/2021/10/12/biden-has-cancelled-115-billion-of-student-loans-but-heres-what-this-means-for-student-loan-forgiveness/?sh=3a8546ea7fd7.

[3] Income Share Agreements, Student Borrower Prot. Ctr., https://protectborrowers.org/income-share-agreements/ (last visited Oct. 18, 2021).

[4] Id.

[5] Shu-Yi Oei & Diane Ring, Human Equity: Regulating the New Income Share Agreements, 68 Vand. L. Rev. 681, 685 (2015).

[6] Id. at 693–94.

[7] Id. at 693.

[8] Richard Price, Unlocking the Potential of ISAs to Tackle the Student Debt Crisis, Christensen Inst. 7 (Aug. 2019), https://files.eric.ed.gov/fulltext/ED603097.pdf

[9] About Us, Vemo, https://vemoeducation.com/about-us/ (last visited Oct. 18, 2021).

[10] See Price, supra note 8, at 7.

[11] Miguel Palacios et al., Investing in Value, Sharing Risk: Financing Higher Education Through Income Sharing Agreements, Am. Enter. Inst. 1–2 (Feb. 2014), https://vtechworks.lib.vt.edu/bitstream/handle/10919/95112/InvestingValueSharingRisk.pdf?sequence=1.

[12] Id. at 7.

[13] Id. at 8.

[14] Id.

[15] Id. at 9.

[16] Id. at 8–9.

[17] See Income Share Agreements, supra note 3.

[18] Elliot Hannon, Is This Indentured Servitude or the New Venture Capital?, SLATE (Oct. 29, 2013, 10:45 AM), https://slate.com/business/2013/10/companies-look-to-loan-you-money-in-return-for-a-percentage-of-your-future-earnings.html.

[19] See, e.g., Ken Previti, The American School for Indentured Servants, RECLAIM REFORM (June 19, 2013), https://reclaimreform.wordpress.com/2013/06/19/the-american-school-for-indentured-servants/ (discussing how corporations are legally indenturing college students as a creative means to profit).

[20] See Oei & Ring supra note 5, at 708.

[21] Greg Madonia & Austin Smith, My Future or Our Future? The Disincentive Impact of Income Share Agreements, Mia. Univ. Farmer Sch. of Bus. 1, 21 (2016).

[22] Stephen Hayes & Alex Milton, Solving Student Debt or Compounding the Crisis? Income Share Agreements and Fair Lending Risk, Student Borrower Prot. Ctr. 4–5 (2020), https://protectborrowers.org/wp-content/uploads/2020/07/SBPC_Hayes_Milton_Relman_ISA.pdf.

[23] See generally Jeff Schwartz, The Corporatization of Personhood, 2015 U. Ill. L. Rev. 1119 (2015) (explaining that ISA fees and other social or transactional costs can add up to make the arrangement burdensome for the borrower).

[24] Jennifer Delaney et al., Perceptions of Income Share Agreements: Evidence from a Public Opinion Survey, 45 J. Edu. Fin. 97, 106 (2019).

[25] Dubravka Ritter & Douglas Webber, Modern Income-Share Agreements in Postsecondary Education: Features, Theory, Applications, Fed. Rsrv. Bank of Phila. 34 (Dec. 2019), https://www.luminafoundation.org/wp-content/uploads/2020/01/modern-isas.pdf.

[26] Hayes & Milton, supra note 22, at 9. Benjamin Roesch, Applying State Consumer Finance and Protection Laws to Income Share Agreements, Student Borrower Prot. Ctr. 7–10 (Aug. 2020), https://protectborrowers.org/wp-content/uploads/2020/08/ISAs-and-State-Law.pdf.

[27] Oei & Ring, supra note 5, at 709–10.

By: Kristina Wilson

Earlier today, November 4, 2016, the Fourth Circuit issued a published opinion in the civil case Wells Fargo Equipment Finance v. Asterbadi. The Fourth Circuit affirmed the District Court’s decision in favor of Wells Fargo. On appeal, the parties disputed whether the statute of limitations on a debt collection judgment against Asterbadi had restarted upon registration in a new district.

Facts and Procedural History

On October 4, 1993, the District Court of Virginia entered a debt collection judgment against Asterbadi for over 2 million dollars. Under Virginia law, the judgment was enforceable for twenty years. Asterbadi made several payments on the judgment, but it remained mostly unsatisfied. The creditor, CIT/Equipment Financing Inc. (“CIT”), registered the debt in Maryland in 2003, pursuant to 28 U.S.C. § 1963. At the time of registration, Asterbadi still owed over 1.5 million dollars on the debt, most of which was interest. After unsuccessful attempts to enforce the judgment against some of Asterbadi’s stocks in Maryland, CIT took no further action to enforce the judgment.

In June of 2007, CIT sold and assigned the judgment to Wells Fargo. Starting in April of 2015, Wells Fargo attempted to enforce the judgment. It filed a notice of assignment and a copy of the assignment in the Circuit Court of Montgomery County, as well as a notice of assignment in the District Court of Maryland. In May of 2015, Asterbadi sought a protective order, stating that Wells Fargo was attempting to enforce a Virginia judgment that was outside Virginia’s and Maryland’s statutes of limitations. In August of 2015, Wells Fargo filed a renewal of its registered judgment in the district court.

The district court ultimately held that the statute of the limitation on the judgment began when the judgment was registered with the district court , which was in August of 2003. Thus, the District Court denied Asterbadi’s motion for a protected order because the judgment was still enforceable against him.

Asterbadi Can Appeal the Protective Order

The Fourth Circuit considered two jurisdictional issues on appeal. First, Wells Fargo argued that Asterbadi’s appeal was limited to an injunction entered against him by CIT in September of 2015. Second, Asterbadi contended that Wells Fargo lacked standing to enforce the judgment.

In September of 2015, the District Court entered an injunction against Asterbadi, and in October of 2015, the District Court denied Asterbadi’s motion for a protective order. Asterbadi appealed the entry of the injunction, but Wells Fargo argued that Asterbadi should have appealed the denial of the protective order instead. However, in its September of 2015 order, the District Court explicitly rejected Asterbadi’s claims that Wells Fargo did not have standing and that the statute of limitations had run on the judgment. The Fourth Circuit stated that these claims were “ necessary conditions precedent” to a grant of injunctive relief. Thus, the Fourth Circuit concluded that Asterbadi could challenge the District Court’s rulings on those two claims.

Wells Fargo Does Have Standing

Asterbadi argued that Wells Fargo lacked standing because it did not comply with Maryland Rule 2-624. Under Maryland Rule 2-624, an assignee may enforce a judgment in its own name when it files the assignment in the court where the judgment was entered. Asterbadi contended that Wells Fargo had only submitted a notice of assignment and not the actual copy of assignment to the District Court. However, Asterbadi himself provided the District Court with a copy of the assignment in an earlier proceeding. Therefore, the District Court had both the notice and the copy of the assignment. The District Court consequently held that Wells Fargo had satisfied Maryland Rule 6-264, and the Fourth Circuit affirmed.

The Judgment’s Statute of Limitations Restarted under Maryland Law

Asterbadi argued that the statute of limitations on the judgment had expired, while Wells Fargo contended that registering the judgment in Maryland constituted a “new judgment” and that the statute of limitations therefore started tolling upon its registration in Maryland.

The Fourth Circuit evaluated both arguments under 28 U.S.C. § 1963. Under this section, debt collection judgments from one district are enforceable in a different jurisdiction if they are registered by filing a certified copy of the judgment in the other jurisdiction’s District Court. The statute’s intent was to minimize the inefficiency and awkwardness of requiring creditors to obtain new judgments against a debtor in order to enforce a judgment in a different jurisdiction. In interpreting § 1963 in this manner, the Fourth Circuit rejected Asterbadi’s contention that the registration was simply a “ministerial act” and a procedural mechanism to enforce the Virginia judgment. The Fourth Circuit reasoned that if registration was just a “ministerial act,” § 1963 would not need to explicitly provide that registered judgments are equally as enforceable as other judgments entered in the registration court.

Because the statute allowed creditors to obtain “new judgments,” without litigation, the Fourth Circuit treated Wells Fargo’s judgment as a “new judgment” upon its registration in Maryland. The Fourth Circuit applied Maryland law and held that debt collection judgments are enforceable for twelve years, pursuant to Maryland Rule 2-625. Accordingly, the judgment against Asterbadi would only have been enforceable until August 27, 2015. However, Wells Fargo filed for renewal on August 26, 2015. Thus, the Fourth Circuit held that Wells Fargo’s judgment will remain enforceable for twelve more years.

Disposition

Therefore, the Fourth Circuit affirmed the District Court’s denial of Asterbadi’s motion for a protective order.

DSC03602-B

By Eric Jones

On July 6, 2015, the Fourth Circuit issued a published opinion in the civil case Jones v. Dancel.  Several plaintiffs, representing a class of individuals who utilized a credit management and debt reduction service, appealed to the Circuit asking that an arbitration award be reversed.  Because the arbitrator had not manifestly disregarded the law, the award was affirmed.

 

The Dispute and Arbitration

Laverne Jones, Stacey Jones, and Kerry Ness (collectively, the Plaintiffs) separately entered into contracts with Genus Credit Management (Genus) for the purposes of debt management and credit counseling.  Under those contracts, Genus was authorized to seek reductions in the Plaintiffs’ owed debts.  Although Genus held itself out as a non-profit organization providing debt management services free of charge, Genus accepted voluntary contributions from both debtors and creditors.  Pursuant to an arbitration clause in their contracts, the Plaintiffs initiated an arbitration action alleging individual and class claims against several original defendants alleging violations of the Credit Repair Organizations Act (CROA or the Act), the Racketeer Influenced and Corrupt Organizations Act, the Maryland Consumer Protection Act (MCPA), the Maryland Debt Management Services Act, and Maryland common law on matters of fraud and breach of fiduciary duty.  After certifying the class for the Plaintiffs’ CROA and MCPA claims, many of the original defendants entered into settle agreements with the class.  These settlements included $2.6 million in attorneys’ fees, and were approved by the arbitrator.  Amerix Corporation, Amerix’s founder Bernaldo Dancel, and several of Amerix’s affiliates (collectively, the Defendants) remained in arbitration.

Plaintiffs specifically alleged that the Defendants had violated CROA by making untrue or mislead statements, and by unlawfully billing consumers for debt management services.  After extensive hearings, however, the arbitrator found that the Defendants had violated CROA only in failing to make certain disclosures to consumers which are mandated under CROA, including a document summarizing their right to accurate information in certain credit reports.  CROA’s damages provision, 15 U.S.C. § 1679g(a)(1)(B), actual damages include “any amount paid by the person to the credit repair organization.”  In interpreting this provision, the arbitrator found that it contemplated payments on a quid pro quo basis, where the payment was in exchange a defined credit repair service.  The arbitrator then reasoned that the Plaintiff’s voluntary contributions were not “amount[s] paid” under CROA, primarily because a significant percentage of class members had not made any voluntary contributions.  Accordingly, the arbitrator denied any actual damages.

As to CROA’s punitive damages provision, 15 U.S.C. § 1679g(a)(2), the arbitrator awarded Plaintiffs $1,948,264 for failing to provide the required disclosures.  This amount was intended to serve as a powerful deterrent to the Defendants.

Finally, as to attorneys’ fees, the arbitrator found that the Plaintiffs had failed to account separately for time spent on the successful and unsuccessful claims, to substantiate proposed lodestar billing rates, and had submitted time and expense entries that were otherwise “defective.”  The arbitrator then concluded that the $2.6 million already received from settlements more than covered the amounts payable, and declined to award additional fees.  The district court affirmed the arbitrator based on the limited standard of review applicable to arbitration awards, and the Plaintiffs filed a timely appeal.

 

The Arbitrator Did Not Manifestly Disregard the Law as to Actual Damages

As explained by the Fourth Circuit, a court may vacate an arbitration award only when the disputed legal principle is clearly defined and not subject to reasonable debate, and the arbitrator refused to apply that principle.  The Plaintiff’s first argument was that their voluntary contributions to Genus constituted “payment” under CROA, and that the arbitrator had manifestly disregarded CROA by finding that they were outside the scope of the Act.  The Circuit disagreed, holding that the definition of “payment” under CROA was well within the scope of reasonable debate, largely because the Act defined a “credit repair organization” as somebody who provided credit repair services “in return for the payment of money.”  Thus, given the absence of any binding precedence on the exact meaning of the term, the arbitrator’s finding that the voluntary contributions were not “payment” was not a clear disregard for established law.  The Circuit explained that other arbitrators may have come to the opposite conclusion, but that the appropriate standard of was limited and thus they could not “pass judgment on the strength of the arbitrator’s chosen rationale.”

 

The Refusal to Award Attorneys’ Fees Did Not Violate CROA

In 15 U.S.C. § 1679g(a)(3), CROA directs that in the case of any successful action under the Act, plaintiffs may recover actual damages as well as “the costs of the action, together with reasonable attorneys’ fees.”  On appeal, the Plaintiffs argued that the arbitrator had thus manifestly disregarded CROA by refusing to award additional attorneys’ fees.  The Fourth Circuit noted, however, that the arbitrator declined to award attorneys’ fees because they were not “reasonable,” and thus were not within the mandate of CROA.  The arbitrator identified several deficiencies with the Plaintiff’s fee requests, including “counsel’s use of “block billing” practices, quotation of unjustified billing rates, and submission of time entries that failed to segregate successful claims from unsuccessful claims.”  The arbitrator also highlighted other improper requests for questionable litigation fees, including “bills from costly restaurants” and excessive travel and lodging costs.  The arbitrator thus did not refuse to heed CROA, but instead found that the fee request in its entirety could be disregarded.  Rather than do so, the arbitrator decided to set off the established amount with the already received fees, and declined to award additional fees.  As explained by the Fourth Circuit, the arbitrator acted well within the law, and thus this argument failed as well.

 

The Fourth Circuit Affirmed the Arbitrator’s Award

Because the arbitrator’s reasoning and ruling did not indicate a manifest disregard for CROA, the Fourth Circuit affirmed the district court’s denial of the Plaintiff’s motion to vacate in part the final award.  As of October 28, 2015, the Plaintiffs have filed a petition for certiorari to the Supreme Court of the United States, which awaits response.