ISA Act of 2017

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 Investing in Student Achievement Act of 2017 ISA Act of 2017 (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 Income-Share Agreements Sec. 101. Tax treatment of proceeds and payments of future income. Sec. 102. Terms and conditions of income-share agreement contracts. Sec. 103. Rulemaking; model disclosure forms. Sec. 104. Truth in Lending Act. Sec. 105. Consent to continuing release of taxpayer information under income share agreement. Title II—Treatment of Income-Share Agreements 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 pre-existing State laws with respect to ability-to-repay and licensing laws. Title III—Qualified Education Loan Sec. 301. Qualified education loan. Title IV—Federal Individual Assistance Treatment of Income-Share Agreements Sec. 401. Proceeds not treated as income in calculation of financial need under the Higher Education Act of 1965. Title V—Treatment Under Securities Laws Sec. 501. Income-share agreements not treated as securities. Sec. 502. Businesses making income-share agreements excluded from investment company treatment. Title VI—Treatment under Federal consumer finance laws Sec. 601. Income-share agreement anti-discrimination protections. Sec. 602. Prohibition on requiring preauthorized electronic fund transfers. Sec. 603. Treatment under the Fair Credit Reporting Act. Sec. 604. Application of the Military Lending Act. Sec. 605. Application of the Servicemembers Civil Relief Act. Sec. 606. Rulemaking. Title VII—Treatment under other laws Sec. 701. Insurance and wagering. Sec. 702. Payments not considered prepayments. 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 income-share agreement to or on behalf of the individual subject to the agreement; (B) has the same term to maturity as the duration of the income-share agreement; 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) which meets the requirements of section 102; and (C) under which— (i) the ISA funder 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 in programs under title IV of the Higher Education Act of 1965), as well as any personal expenses (such as books, supplies, transportation, and living costs) incurred by the individual while enrolled in such a program, or for the refinancing of debt used for these purposes (hereinafter in this Act referred to as income-share funding (ii) such individual pays to such ISA funder (or the ISA funder’s successor in interest) amounts equal to a specified percentage of the individual’s future income, for a defined term (hereinafter in this Act referred to as income-share payments (3) ISA funder With respect to an income-share agreement, the term ISA funder (A) pays amounts to, or on behalf of, an individual solely for the purposes specified in paragraph (2)(C)(i); and (B) has the right to receive a specified percentage of the individual’s future income. (4) Qualified ISA The term Qualified ISA (A) Affordability for low after-school income The income-share agreement provides that when an individual subject to the agreement has an income that is equal to or below the amount that is 150 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 (B) Limit on percentage of income The maximum percentage of income an individual would be required to pay under the agreement does not exceed 20 percent, and the product of such percentage and the number of years of the agreement does not exceed 2.25 (which figure is the product of 7.5 percent and the number of years in the longest allowable contract under section 102(a)(3)). (C) Appropriate risk sharing The payments required under such agreement for an individual with income during the payment term equal to 175 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 (5) State The term State (6) State law The term State law I Tax Treatment of Income-Share Agreements 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 which is paid to or on behalf of such individual under an income-share agreement. (2) Difference in repayment not included as gross income In the case of an income-share agreement 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 an income-share agreement shall be treated— (A) first, with respect to so much of such amount as does not exceed the income-share funding under such agreement, 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 income-share agreement contracts (a) Terms and conditions An income-share agreement shall not be treated as meeting the requirements of this section unless: (1) Specified percentage of income The agreement specifies the percentage of future income required to be paid. (2) Definition of income The income-share agreement specifies the definition of income to be used for purposes of calculating an individual’s obligation to pay under the agreement, which shall not in any case include the income of the individual’s children. (3) Specified duration; extension of period (A) Duration The agreement specifies the maximum period of time during which the individual will be obligated to pay a percentage of the individual’s future income (excluding periods when just a nominal payment (as described under paragraph (5)) is required), which may not (except as provided in subparagraph (B)) exceed 360 months. (B) Extension of period The agreement may provide for the extension of such period by a number of months during which the individual’s percentage of income obligation (excluding nominal payments and fees) was zero, either because of further enrollment in education or training or the individual’s income was below the level at which payments are required in the agreement. (4) Early termination The agreement specifies the terms and conditions under which the individual subject to the agreement may terminate the agreement. (5) Nominal payments The agreement specifies any nominal monthly payment that is required during periods when the individual subject to the agreement has no percentage of income obligation, except that 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). (b) Required disclosures An income-share agreement does not comply with the requirements of this section unless the individual who is committing under the agreement to pay future income is provided, before entering into such agreement, a written document that clearly and simply discloses— (1) that the agreement is not a debt instrument, and that the amount the individual will be required to pay under the agreement— (A) may be more or less than the amount provided to the individual pursuant to the agreement; and (B) will vary in proportion to the individual’s future income; (2) that the obligations of the individual under the agreement are not dischargeable under bankruptcy law, except in a case that would impose an undue hardship on the debtor and the debtor’s dependents; (3) whether the obligations of the individual under the agreement may be extinguished through prepayment and, if so, under what terms; (4) the duration of the individual’s obligations under the agreement (absent such prepayments), including any circumstances under which the duration of the agreement would be extended or discharged; (5) the percentage of income the individual is committing to pay under the agreement, including whether the percentage of income is fixed or variable under the agreement, and the minimum amount of annual income that triggers the individual’s obligation under the agreement to make payments for such year; (6) the definition of income to be used for purposes of calculating the individual’s obligation under the agreement; (7) a comparison of— (A) the amounts an individual would be required to pay under the income-share agreement 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 agreement, as determined in accordance with guidance issued by the Director of the Bureau of Consumer Financial Protection; to (B) the amounts required to be paid under one or more comparable loans, including a loan at an interest rate determined by the Director of the Bureau of Consumer Financial Protection to be an approximation of the interest rate available to student loan borrowers in the private marketplace and, where applicable, a Federal Stafford loan; (8) income verification documentation, including personal tax records submitted to the Internal Revenue Service, that the individual may be required to provide under the agreement; (9) intent to conduct annual reconciliation relating to obligations owed by the individual under the agreement; and (10) any nominal payments required under the agreement. (c) Non-Interference An income-share agreement represents an obligation by the individual pay the specific percentage of future income, but shall not be construed to give the contract holder any rights over an individual’s actions. (d) Effect of failure To provide documentation (1) In general Absent income documentation from an individual under an income-share agreement, the ISA funder of such agreement (or the funder’s successor in interest) may assume a certain income level for the individual, up to the level that would create an obligation equal to the maximum payment amount under the agreement. (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 was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements. (3) Verification of income If an individual supplies an ISA funder (or its successor in interest) with their income verification information within 180 days of the ISA funder (or its 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 their actual obligation under the contract either refunded to them or credited to future obligations under the contract. 103. Rulemaking; model disclosure forms (a) No Bureau general rulemaking authority Except as provided under subsection (b) and section 102(b)(7), the Director of the Bureau of Consumer Financial Protection may not issue regulations under this title. (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). 104. Truth in Lending Act Any income-share agreement that complies with the disclosure requirements of section 102(b) shall be deemed to be in compliance with the Truth in Lending Act. 105. Consent to continuing release of taxpayer information under income share agreement 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 an 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 agreement. II Treatment of Income-Share Agreements Under State Law 201. Lawfulness of contracts; preemption of State law Any income-share agreement that complies with the requirements of section 102 shall be a valid, binding, and enforceable contract notwithstanding any State law limiting or otherwise regulating assignments of future wages or other income. 202. Preemption of State law with respect to usury A Qualified ISA shall not be subject to State law with respect to usury, unless such State law was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements. 203. Preemption 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 Qualified Education Loan 301. Qualified education loan (a) In general Paragraph (1) of section 221(d) Such term includes any income-share agreement (as such term is defined in section 2 of the Investing in Students Act of 2017) that complies with the requirements of section 102 of such Act, except that payments made by the taxpayer during the taxable year to meet an income-share agreement obligation shall not be taken into account under subsection (a). (b) Information reporting not required Subsection (e) of section 6050S of such Code is amended by inserting (without regard to the last sentence thereof) section 221(d)(1) IV Federal Individual Assistance Treatment of Income-Share Agreements 401. 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 an income-share agreement that complies with the requirements of section 102 of this Act 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 V Treatment Under Securities Laws 501. Income-share agreements not treated as securities 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) 502. Businesses making income-share agreements 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 after industrial banking, income-share agreements (as defined in section 2 of the Investing in Students Act of 2017), (2) in paragraph (5)— (A) by inserting , including purchasing or otherwise acquiring income-share agreements (as defined in section 2 of the Investing in Students Act of 2017) services (B) by inserting , including making income-share agreements (as so defined) services VI Treatment under Federal consumer finance laws 601. Income-share agreement anti-discrimination protections Section 702 of the Equal Credit Opportunity Act ( 15 U.S.C. 1691a (1) in subsection (d), by inserting before the period the following: , or the right granted under an income-share agreement (as defined in section 2 of the Investing in Students Act of 2017) (2) in subsection (e)— (A) by striking or any assignee any assignee (B) by inserting before the period the following: ; or any person who regularly extends, renews, or continues funding under an income-share agreement (as defined in section 2 of the Investing in Students Act of 2017) 602. Prohibition on requiring preauthorized electronic fund transfers Section 913(1) of the Electronic Fund Transfer Act ( 15 U.S.C. 1693k(1) a consumer or the entering into of an income-share agreement (as defined in section 2 of the Investing in Students Act of 2017) with a consumer 603. Treatment under the Fair Credit Reporting Act Section 605 of the Fair Credit Reporting Act ( 15 U.S.C. 1681c (i) Income-Share agreement information With respect to an income-share agreement (as defined in section 2 of the Investing in Students Act of 2017), a consumer report made by a consumer reporting agency— (1) may include a description of the contract terms of the income-share agreement and, subject to subsection (a), information with respect to amounts that are owed under such agreement; and (2) may not include any speculation about future amounts that may be owed under the income-share agreement. . 604. 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: (i) Treatment of income-Share agreements The Secretary of Defense shall issue regulations to apply this section to income-share agreements (as defined in section 2 of the Investing in Students Act of 2017), and an income-share agreement shall be deemed to meet the annual percentage rate of interest limitation under subsection (b) if such agreement would meet the requirements of section 2(4)(C) of the Investing in Student Achievement Act of 2017 (related to appropriate risk sharing) but with reference to the rate specified in subsection (b). . 605. Application of the Servicemembers Civil Relief Act Section 207 of the Servicemembers Civil Relief Act ( 50 U.S.C. 3937 (f) Treatment of income-Share agreements The Secretary of Defense shall issue regulations to apply this section to income-share agreements (as defined in section 2 of the Investing in Students Act of 2017), specifically by stating that an income-share agreement shall be considered to have met the requirements of this section if the agreement would meet the requirements of section 2(4)(C) of the Investing in Student Achievement Act of 2017 (relating to appropriate risk sharing) but with reference to the rate specified in subsection (a)(1). . 606. Rulemaking Not later than 180 days after the date of enactment of this Act— (1) the Director of the Bureau of Consumer Financial Protection shall issue regulations to carry out the amendments made by section 601 and 602; and (2) the Secretary of Defense shall issue regulations to carry out the amendment made by section 604 and 605. VII Treatment under other laws 701. Insurance and wagering Income-share agreements shall not be treated as a contract for insurance or a betting or wagering contract under any Federal or State law. 702. Payments not considered prepayments With respect to an income-share agreement, any requirement that an individual pay an amount greater than the income-share funding in order to extinguish the income-share agreement obligation earlier than the end of the term shall not be considered a prepayment penalty for purposes of any Federal or State law with respect to prepayment penalties.

Summary: Investing in Student Achievement Act of 2017 or the ISA Act of 2017 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.