ISA Student Protection Act of 2019

To provide the legal framework and income tax treatment necessary for the growth of innovative private financing options, and for other purposes. 1. Short title; table of contents (a) Short title This Act may be cited as the ISA Student Protection Act of 2019 (b) Table of contents The table of contents for this Act is as follows: Sec. 1. Short title; table of contents. Sec. 2. Definitions. TITLE I—Tax Treatment of a Qualified ISA Sec. 101. Tax treatment of proceeds and payments of future income. Sec. 102. Terms and conditions of Qualified ISAs. Sec. 103. Rulemaking; model disclosure forms. Sec. 104. Truth in Lending Act. Sec. 105. Consent to continuing release of taxpayer information under Qualified ISAs and income-share agreements. TITLE II—Treatment of a Qualified ISA Under State Law Sec. 201. Lawfulness of contracts; preemption of State law. Sec. 202. Preemption of State law with respect to usury. Sec. 203. Preemption of pre-existing State laws with respect to ability-to-repay and licensing laws. TITLE III—Federal Individual Assistance Treatment of a Qualified ISA Sec. 301. Proceeds not treated as income in calculation of financial need under the Higher Education Act of 1965. TITLE IV—Treatment Under Securities Laws Sec. 401. Qualified ISAs not treated as securities. Sec. 402. Businesses making Qualified ISAs excluded from investment company treatment. TITLE V—Treatment Under Federal Consumer Finance Laws Sec. 501. Qualified ISA anti-discrimination protections. Sec. 502. Prohibition on requiring preauthorized electronic fund transfers. Sec. 503. Treatment under the Fair Credit Reporting Act. Sec. 504. Application of the Fair Debt Collection Practices Act. Sec. 505. Application of the Military Lending Act. Sec. 506. Application of the Servicemembers Civil Relief Act. Sec. 507. Rulemaking. TITLE VI—Treatment Under Other Laws Sec. 601. Insurance and wagering. Sec. 602. Payments not considered prepayments. TITLE VII—Reporting Requirement for the Bureau of Consumer Financial Protection Sec. 701. Report. 2. Definitions For purposes of this Act: (1) Comparable loan The term comparable loan (A) has an original principal amount such that, after any origination fees on the loan are paid, the amount of loan financing received by the individual is equal to the total amount of funding provided under the Qualified ISA to or on behalf of the individual subject to the Qualified ISA; (B) has the same disbursement or funding date, payment start date, and number of required monthly payments; and (C) is fully amortized over such term with monthly payments of principal and interest. (2) Income-share agreement The term income-share agreement (A) between an individual and an ISA funder; (B) under which— (i) the ISA funder credits towards the tuition or other obligations of, or pays amounts to, or on behalf of, such individual for costs associated with a postsecondary training program, or any other program designed to increase the individual’s human capital, employability, or earning potential (and not limited to programs eligible to participate as programs under title IV of the Higher Education Act of 1965 ( 20 U.S.C. 1070 (ii) such individual pays to such ISA funder (or the ISA funder’s successor in interest) income-share payments for a defined term; and (C) is not a loan. (3) Income-share funding The term income-share funding (A) costs associated with a postsecondary training program, or any other program designed to increase the individual’s human capital, employability, or earning potential (and not limited to programs eligible to participate as programs under title IV of the Higher Education Act of 1965 ( 20 U.S.C. 1070 (B) an allowance for books, supplies, transportation, and miscellaneous personal expenses, including a reasonable allowance for— (i) the documented rental or purchase of a personal computer; or (ii) the refinancing of debt used for the costs described in this subparagraph. (4) Income-share payment The term income-share payment (5) ISA funder With respect to a Qualified ISA, the term ISA funder (A) credits towards the tuition or other obligations of, or pays amounts to, or on behalf of, an individual solely for the purposes specified in paragraph (3)(A)(i); and (B) has the right to receive a specified percentage of the individual’s future income. (6) Qualified ISA The term Qualified ISA (A) is not a loan, but is an income-share agreement under which— (i) the ISA funder credits towards the tuition or other obligations of, or pays amounts to, or on behalf of, such individual for income-share funding; and (ii) such individual pays to such ISA funder (or the ISA funder’s successor in interest); and (B) meets the requirements of subsections (a) and (b) of section 102. (7) State The term State (8) State law The term State law (A) any law, decision, rule, regulation, or other action having the effect of a law of any State or any political subdivision of a State, or any agency or instrumentality of a State or political subdivision of a State; and (B) any law of the United States applicable only to the District of Columbia. I Tax Treatment of a Qualified ISA 101. Tax treatment of proceeds and payments of future income For purposes of the Internal Revenue Code of 1986: (1) Funding excluded from gross income In the case of an individual, gross income shall not include the amount of any income-share funding that is credited toward the tuition or other obligations of, or paid to or on behalf of, such individual under a Qualified ISA. (2) Difference in repayment not included as gross income In the case of a Qualified ISA under which the income-share funding exceeds the total income-share payments (in any period over the life of the contract), the individual’s gross income shall not include the amount of such excess. (3) Treatment of payments of future income The amount of any income-share payments under a Qualified ISA shall be treated— (A) first, with respect to so much of such amount as does not exceed the income-share funding under such Qualified ISA, as a recovery of investment (with a corresponding reduction in basis) in the contract; and (B) second, as income on the contract which is includible in gross income. 102. Terms and conditions of Qualified ISAs (a) Terms and conditions Each Qualified ISA shall comply with the following: (1) Specified percentage of income (A) In general The Qualified ISA specifies the percentage of future income required to be paid. (B) Maximum percentage The maximum percentage of income an individual would be required to pay under the Qualified ISA shall not exceed 20 percent, and the product of such percentage and the number of monthly payments required under the Qualified ISA divided by 12 shall not exceed 2.25 (which figure is the product of 7.5 percent and the number of years in the longest allowable contract under paragraph (4)(A)). (2) Definition of income The Qualified ISA specifies the definition of income to be used for purposes of calculating an individual’s obligation to pay under the Qualified ISA, which— (A) shall not in any case include the income of the individual’s children; (B) shall not include— (i) any amount paid to the individual under title II or XVI of the Social Security Act ( 42 U.S.C. 401 42 U.S.C. 601 (ii) any amount received by the individual under the Child Nutrition Act of 1966 ( 42 U.S.C. 1771 (C) shall include revenue sources primarily incurred from an individual's employment; and (D) may include another revenue source besides employment if an individual has voluntarily chosen to not seek employment and is still receiving significant revenue from another source. (3) Affordability for low after-school income (A) In general The Qualified ISA provides that when an individual subject to the Qualified ISA has an income that is equal to or below the threshold amount described in subparagraph (B), the percentage of income obligation for the individual is zero. (B) Threshold amount The threshold amount under this subparagraph is an amount equal to (or at the option of the ISA funder, greater than)— (i) 200 percent of the poverty line for a single person (as defined in section 673 of the Community Services Block Grant Act ( 42 U.S.C. 9902 (ii) in the case of a Qualified ISA entered into before January 1, 2020, 150 percent of such poverty line for a single person. (C) Allowance of fees or nominal payments Subparagraph (A) shall not be interpreted to preclude the charging of fees or nominal payments (as described in paragraph (8)) during this period. (4) Specified duration; extension of period (A) Duration The Qualified ISA specifies the maximum period of time during which the individual will be obligated to make a specified number of monthly payments of a percentage of the individual’s future income (excluding periods when just a nominal payment (as described under paragraph (8)) is required), which may not (except as provided in subparagraph (B)) exceed 360 months. (B) Extension of period The Qualified ISA may provide for the extension of such period by the number of months during which the individual’s percentage of income obligation (excluding nominal payments and fees) was zero. (5) Early termination The Qualified ISA specifies the terms and conditions under which the individual subject to the agreement may terminate the agreement. (6) Appropriate risk sharing The payments required under the Qualified ISA for an individual with income during the payment term that is less than or equal to 225 percent of the poverty line for a single person (as defined in section 673 of the Community Services Block Grant Act ( 42 U.S.C. 9902 (7) Aggregate limitation on obligation The Qualified ISA provides that the total percentage of future income of the individual that the individual agrees to pay, under the current Qualified ISA and any other Qualified ISAs previously entered into by the individual, shall not exceed 20 percent. (8) Nominal payments The Qualified ISA specifies any nominal monthly payment that is required during periods when the individual subject to the Qualified ISA has no percentage of income obligation, except that— (A) such nominal monthly payment shall not exceed twenty-five dollars per month (adjusted each year to reflect changes in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the Department of Labor for the most recent 12-month period for which the data are available); and (B) the total number of nominal payments that may be required shall not exceed the maximum number of allowable payments described in paragraph (4)(A). (9) Protections (A) In general The Qualified ISA specifies, at a minimum, individual rights with respect to each of the following: (i) Default or delinquency. (ii) Overpayment or underpayment. (iii) Disability. (iv) Death. (v) Service as a member of the armed services (including the National Guard and Reserves). (B) Prior ISAs If a Qualified ISA executed prior to the date of enactment of this Act does not meet the requirements in subparagraph (A), the ISA funder shall come into compliance with such subparagraph by issuing, not later than 180 days after the date of enactment of this Act, an addendum to the Qualified ISA that contains the information described in such subparagraph. (b) Required disclosures (1) In general An ISA funder of a Qualified ISA shall provide, to any individual intending to commit under a Qualified ISA to pay future income and before the individual enters into the agreement under the Qualified ISA, a written document that clearly and simply discloses— (A) that the Qualified ISA is not credit or a loan, and that the amount the individual will be required to pay under the Qualified ISA— (i) may be more or less than the amount provided to the individual pursuant to the Qualified ISA; and (ii) will vary in proportion to the individual’s future income; (B) that the obligations of the individual under the Qualified ISA are dischargeable under bankruptcy law; (C) a description of the terms in which the obligations of the individual under the Qualified ISA shall be extinguished in advance of full duration of the agreed-to term; (D) the duration of the individual’s obligations under the Qualified ISA (absent such extinguishment), including any circumstances under which the duration of the Qualified ISA would be extended or extinguished; (E) the percentage of income the individual is committing to pay under the Qualified ISA, including whether the percentage of income is fixed or variable under the Qualified ISA, and the minimum amount of annual income that triggers the individual’s obligation under the Qualified ISA to make payments for such year; (F) the definition of income to be used for purposes of calculating the individual’s obligation under the Qualified ISA; (G) (i) a comparison of— (I) the amounts and number of payments an individual would be required to pay under the Qualified ISA at a range of annual income levels, which income levels shall correspond to the levels the individual might reasonably be expected to make given the intended use of the funds provided under the Qualified ISA, as determined in accordance with guidance issued by the Director of the Bureau of Consumer Financial Protection; to (II) the amounts and number of payments required to be paid under one or more comparable loans, including, at a minimum— (aa) a loan at a fixed or variable interest rate and with a number of payments determined by the Director of the Bureau of Consumer Financial Protection to be an approximation of the fixed or variable interest rate available to student loan borrowers in the private marketplace; and (bb) a comparable Federal Direct PLUS loan under part D of title IV of the Higher Education Act of 1965 ( 20 U.S.C. 1087a (ii) a prominent notice accompanying the comparison that clearly and conspicuously advises that loan payments may be required regardless of the income of an individual; (H) income verification documentation, including personal tax records submitted to the Internal Revenue Service, that the individual may be required to provide under the Qualified ISA; (I) intent to conduct annual reconciliation relating to obligations owed by the individual under the Qualified ISA; and (J) any nominal payments, as described in subsection (a)(8), required under the Qualified ISA. (2) No other material terms The Qualified ISA disclosures required by paragraph (1) shall be provided in a clear and conspicuous manner, and shall not be disclosed together with any other material terms or conditions that may be applicable to the Qualified ISA. (c) Non-Interference A Qualified ISA represents an obligation by the individual to pay the specific percentage of future income, but shall not be construed to give the contract holder any rights over an individual’s actions other than as provided in this Act. (d) Effect of failure To provide documentation (1) In general Absent income documentation from an individual under a Qualified ISA, the ISA funder of such Qualified ISA (or the funder’s successor in interest) may assume a certain monthly income level for the individual, up to the greater of— (A) the level that would create an obligation that is approximately equal to the amount required to return the initial Qualified ISA amount to the ISA funder over the remaining required payments; or (B) the average monthly income for the individual from the previous 6 months of employment. (2) Treatment under State law Any obligation resulting from an assumed income level under paragraph (1) shall not be considered to be imposing an unlawful fee under a State law unless such State law expressly states that it is intended to apply to Qualified ISAs. (3) Verification of income If an individual supplies an ISA funder (or the funder's successor in interest) with the individual's income verification information within 180 days of the ISA funder (or the funder's successor in interest) assuming an income level for such individual under paragraph (1), the individual shall be entitled to have any payments that were made in excess of the individual's actual obligation under the contract either refunded to the individual or credited to future obligations under the Qualified ISA. 103. Rulemaking; model disclosure forms (a) No Bureau general rulemaking authority Except as provided under subsection (b) and section 102(b)(1)(G), the Director of the Bureau of Consumer Financial Protection may not issue regulations under this title or pursuant to any other authority granted to the Bureau of Consumer Financial Protection under the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Public Law 111–203 (b) Model disclosure forms (1) In general Not later than 180 days after the date of the enactment of this Act, the Director of the Bureau of Consumer Financial Protection, after engaging in appropriate consumer testing of such forms, shall promulgate a model disclosure form for the disclosures required under section 102(b). (2) Safe harbor Any person who uses the model disclosure form promulgated pursuant to paragraph (1) and includes accurate information required under section 102(b) shall be deemed to be in compliance with the disclosure requirements under section 102(b) and shall not be subject to any State law (including regulations) to the extent that such law imposes any additional or differing disclosure requirements. 104. Truth in Lending Act Any Qualified ISA shall not be considered credit and ISA funders (and their successors in interest) shall not be considered creditors, as those terms are defined in section 103 of the Truth in Lending Act ( 15 U.S.C. 1602 105. Consent to continuing release of taxpayer information under Qualified ISAs and income-share agreements By not later than 180 days after the date of enactment of this Act, the Secretary of the Treasury shall modify Treasury Regulations and guidance to provide for continuing consent to disclosure of an individual’s return information to an ISA funder (or the funder’s successor in interest) under a Qualified ISA or income-share agreement, but only for periods relevant to, and only to the extent the Secretary determines is necessary and appropriate in carrying out the terms of, such Qualified ISA or income-share agreement. II Treatment of a Qualified ISA Under State Law 201. Lawfulness of contracts; preemption of State law (a) In general A Qualified ISA shall be a valid, binding, and enforceable contract notwithstanding any State law limiting or otherwise regulating assignments of future wages or other income. (b) Good faith reliance An ISA funder may rely in good faith on a statement from the individual obligated by a Qualified ISA with respect to such individual’s aggregate obligation on the Qualified ISA. 202. Preemption of State law with respect to usury A Qualified ISA shall not be subject to State law with respect to usury, credit, loans, or credit or installment sales, unless such State law expressly states that it is intended to apply to Qualified ISAs. 203. Preemption of pre-existing State laws with respect to ability-to-repay and licensing laws A Qualified ISA shall not be subject to a State law with respect to ability-to-repay III Federal Individual Assistance Treatment of a Qualified ISA 301. Proceeds not treated as income in calculation of financial need under the Higher Education Act of 1965 No portion of any amounts received by an individual for entering into a Qualified ISA or an income-share agreement shall be included as income or assets in the computation of expected family contribution for any program funded in whole or in part under the Higher Education Act of 1965 ( 20 U.S.C. 1001 IV Treatment Under Securities Laws 401. Qualified ISAs not treated as securities A Qualified ISA and an income-share agreement shall not be treated as a security for purposes of the securities laws (as defined in section 3(a) of the Securities Exchange Act of 1934 ( 15 U.S.C. 78c(a) 402. Businesses making Qualified ISAs excluded from investment company treatment Section 3(c) of the Investment Company Act of 1940 ( 15 U.S.C. 80a–3(c) (1) in paragraph (4), by inserting Qualified ISAs or income-share agreements (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 industrial banking, (2) in paragraph (5)— (A) by inserting , including purchasing or otherwise acquiring Qualified ISAs or income-share agreements (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 services (B) by inserting , including making Qualified ISAs or income-share agreements (as so defined) services V Treatment Under Federal Consumer Finance Laws 501. Qualified ISA anti-discrimination protections The Equal Credit Opportunity Act ( 15 U.S.C. 1691 (1) in section 701(b) ( 15 U.S.C. 1691(b) (A) in the matter preceding paragraph (1), by inserting or an ISA funder or its successor in interest creditor (B) in paragraph (4), by striking or (C) in paragraph (5), by striking the period at the end and inserting ; or (D) by adding at the end the following: (6) to set the terms of a Qualified ISA or an income-share agreement (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 ; and (2) in section 702 ( 15 U.S.C. 1691a (A) in subsection (d), by inserting , or the right granted under a Qualified ISA or an income-share agreement (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 (B) in subsection (e)— (i) by striking or any assignee any assignee (ii) by inserting or any person who regularly extends, renews, or continues funding under a qualified ISA or an income-share agreement (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 502. Prohibition on requiring preauthorized electronic fund transfers Section 913(1) of the Electronic Fund Transfer Act ( 15 U.S.C. 1693k(1) or the entering into a Qualified ISA or an income-share agreement (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 a consumer 503. Treatment under the Fair Credit Reporting Act (a) In general Section 605 of the Fair Credit Reporting Act ( 15 U.S.C. 1681c (i) Qualified ISA information With respect to a Qualified ISA or an income-share agreement (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 (1) may include a description of the contract terms of the Qualified ISA or income-share agreement, as applicable, and, subject to subsection (a), information with respect to amounts that are owed under the Qualified ISA; and (2) may not include any speculation about future amounts that may be owed under the Qualified ISA or income-share agreement, as applicable. . (b) Regulations The Director of the Bureau of Consumer Financial Protection shall promulgate regulations with respect to the manner in which ISA funders may furnish, and consumer reporting agencies may report, information regarding Qualified ISAs and income-share agreements. 504. Application of the Fair Debt Collection Practices Act (a) In general Section 803 of the Fair Debt Collection Practices Act ( 15 U.S.C. 1692a (1) in paragraph (5), by inserting , including a Qualified ISA and an income-share agreement, as those terms are defined in section 2 of the ISA Student Protection Act of 2019 (2) in paragraph (6), in the first sentence, by inserting , including an ISA funder, as defined in section 2 of the ISA Student Protection Act of 2019 means any person (b) Rule of construction Nothing in this section, or the amendments made by this section, may be construed for purposes of any other Federal law as considering— (1) Qualified ISAs or income-share agreements as debts; or (2) ISA funders as debt collectors. 505. Application of the Military Lending Act Section 987 of title 10, United States Code, is amended— (1) by redesignating subsection (i) as subsection (j); and (2) by inserting after subsection (h) the following new subsection: (i) Treatment of Qualified ISAs and income-Share agreements The Secretary of Defense shall issue regulations to apply this section to Qualified ISAs and income-share agreements (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 . 506. Application of the Servicemembers Civil Relief Act Section 207 of the Servicemembers Civil Relief Act ( 50 U.S.C. 3937 (f) Treatment of Qualified ISAs and income-Share agreements The Secretary of Defense shall issue regulations to apply this section to Qualified ISAs and income-share agreements (as those terms are defined in section 2 of the ISA Student Protection Act of 2019 . 507. Rulemaking Not later than 180 days after the date of enactment of this Act— (1) the Director of the Bureau of Consumer Financial Protection, in consultation with such other agency heads as the Director considers appropriate, shall issue regulations to carry out the amendments made by sections 501, 502, and 503; and (2) the Secretary of Defense shall issue regulations to carry out the amendments made by sections 505 and 506. VI Treatment Under Other Laws 601. Insurance and wagering A Qualified ISA and an income-share agreement shall not be treated as a contract for insurance or a betting or wagering contract under any Federal or State law. 602. Payments not considered prepayments With respect to a Qualified ISA or an income-share agreement, any requirement that an individual pay an amount greater than the income-share funding in order to extinguish the Qualified ISA obligation or income-share agreement, as applicable, earlier than the end of the term shall not be subject to any Federal or State law with respect to prepayment penalties. VII Reporting Requirement for the Bureau of Consumer Financial Protection 701. Report Not less than frequently than once every 5 years, the Director of the Bureau of Consumer Financial Protection shall submit to Congress a report that includes— (1) information on the prevalence and utilization of Qualified ISAs and income-share agreements; and (2) any other information pertaining to Qualified ISAs and income-share agreements that the Director determines is appropriate.

Summary: ISA Student Protection Act of 2019 This bill provides for income-share agreements whereby a student agrees to pay a percentage of future income, for a specified period of time, in exchange for funds to pay for educational expenses. The bill places caps on the percentage of a student's future income that may go towards repayment, provides income minimums under which the required payment is zero, and establishes limitations on the length of these agreements. The bill provides for the treatment of these agreements under various laws, including tax, securities, and consumer finance laws.