Share Agreements NCHER Legal Committee Meeting March 24 2017 Washington DC Tonio DeSorrento Chief Executive Officer Vemo Education 7033895020 toniovemocom Heather S Klein ID: 808606
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Slide1
Legal Framework ofIncome Share Agreements
NCHER Legal Committee MeetingMarch 24, 2017Washington, D.C.
Tonio
DeSorrento
Chief Executive Officer,
Vemo
Education
703.389.5020
tonio@vemo.com
Heather S. Klein
Associate, Ballard Spahr LLP
Consumer
Financial Services Group
Higher Education Group
215.864.8732
kleinh@ballardspahr.com
Slide2RoadmapWhat is an ISA?Sale of an Income StreamConsumer Credit LawsBankruptcy and Tax Laws
Proposed Federal LegislationState Law DevelopmentsPurdue’s Back a Boiler ISA
Slide3What is an ISA?In exchange for receiving funds, an individual agrees to pay a percentage of future income over a defined number of years.Amount paid under an ISA may be less or more than amount of funds received
Traditional model connects investors directly with students Newer model is school-based (Purdue, coding schools, possibly Washington College)Vemo works with higher education institutions to develop and implement income-based finance programs on their campuses
Slide4Sale of an Income StreamBecause ISAs are not absolutely repayable, they should fall outside of lending and usury lawsAkin to properly structured royalty agreements, litigation funding arrangements and merchant cash advances
Generally, where there is no (or low) risk of loss, courts recharacterize transaction as a loanBut where payment of a debt is “put in hazard” or depends upon a “bona fide contingency,” courts have held that there can be no usury Because there is no ownership or control, ISAs should not be considered equity
Slide5Consumer Credit LawsConsumer credit laws do not apply by their plain terms since an ISA is not an extension of creditISAs should incorporate relevant consumer protectionsNon-discrimination
Notices of adverse actionClear disclosures about product cost and termsFair debt collectionUDAPs/UDAAPs prohibited
Slide6Bankruptcy and Tax LawsTreatment under bankruptcy and tax laws is unsettled Possibly non-dischargeable in bankruptcy subject to undue hardship exceptionAny shortfall in amount paid may be taxable as excess consideration for the sale of the income stream
Proposed federal legislation could provide needed clarification
Slide7Proposed Federal LegislationRubio-Young S. 268 (Investing in Student Success Act)
Preempts state laws “limiting or otherwise regulating assignments of future wages or other income” and state usury lawsSets minimum income threshold of $15,000 (adjusted annually) before requiring payments (permits extensions of payment term)Caps costsIncome share capped under “comparable loan” test (X% multiplied by $15,000 ≤ 12-month P&I payments on loan with 20% fixed interest rate)15% max. aggregate income share across an individual’s ISAs2.25 max. “commitment factor” across ISAs (income share multiplied by remaining years in ISA term)
Slide8Proposed Federal Legislation (cont.)Rubio-Young bill (cont.) – Disclosures
Not a debt instrument; payments vary based on future income and may be more or less than amount providedNon-dischargeable except in case of undue hardship on debtor and dependentsHow obligations may be extinguished by accelerating paymentsPayment term and when it may be extended
Income share, definition of income, and minimum income threshold
Comparison of payments at “reasonably expected” income levels with payments made under “comparable loan” with 10% fixed interest rate
Treasury to issue model disclosure form
Slide9Proposed Federal Legislation (cont.)Rubio-Young bill (cont.) – Tax, student loan and investment company laws
Clarifies that ISA funds and any shortfall in amount paid would not be gross income to studentExcess in amount paid would be gross income to funderDefines ISAs as “qualified education loans” but excludes payments from interest deductionExcludes ISA funds from expected family contribution for HEA programsExcludes businesses making ISAs from investment company treatmentDraft House bill under circulation would give CFPB oversight authority and clarify applicability of consumer finance, bankruptcy and tax laws
Slide10State Law DevelopmentsA few states have recently introduced or enacted legislation to study and report on ISAsUnder new Connecticut law, Student Loan Ombudsman “may” report on the feasibility of establishing an ISA program by July 1, 2017
An amendment moving through the CT Senate requests an analysis of an “appropriate commitment factor”Ohio’s proposed budget bill would direct the Chancellor of Higher Education to issue an ISA report by June 30, 2018Lawmakers in Washington, Oregon and Minnesota introduced ISA legislation in prior sessions
Slide11Purdue’s “Back a Boiler” ISAFunding amount: $5,000 - $32,000
Income share: 0.75% - 10% Payment term: 80 - 116 monthsApplication, Approval and Final disclosures modeled on private education loan disclosuresPayments capped at 2.5 x funding amountDefermentHigher education or training
Annual income ≤ $20,000
Unemployed
Not in labor force (e.g., illness, childcare)
Program to expand in 2017-2018
Slide12Questions?
Tonio DeSorrento Chief Executive Officer, Vemo
Education
703.389.5020
tonio@vemo.com
Heather S. Klein
Associate, Ballard Spahr LLP
Consumer
Financial Services Group
Higher Education Group
215.864.8732
kleinh@ballardspahr.com
Vemo
Education
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VemoEd
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Slide13Tonio DeSorrento CEO, Vemo Education
Tonio DeSorrento is cofounder and CEO of Vemo Education (Vemo.com), an education technology company working with colleges and universities to power income-based student financing models.
DeSorrento
has contributed to the development of financial products that align colleges and students since 2007. He has broad experience in education finance, serving as outside counsel to Sallie Mae on its student loan securitization and conduit funding programs and advising other student lenders on matters ranging from product development to debt and equity finance.
DeSorrento
was most recently at
SoFi
, where he was the primary transactional and financial products lawyer for the company. He helped lead the development of
SoFi’s
retail investment products and helped establish a broad array of vehicles and structures that allowed alumni, strategic investors and other institutions to invest in
SoFi’s
loans.
A former U.S. Marine Corps officer,
DeSorrento
is a graduate of the U.S. Naval Academy and Georgetown Law. He co-wrote the American Enterprise Institute paper “Investing in Value, Sharing Risk: Financing Higher Education Through Income Share Agreements” and continues to actively participate in the development of education finance policy.
Slide14Heather S. Klein Associate, Ballard Spahr
Heather Klein is a member of Ballard Spahr’s Consumer Financial Services and Higher Education Groups as well as the firm’s Fair Lending Task Force.Heather’s higher education practice emphasizes counseling companies and higher education institutions on innovative and traditional student financing programs, including issues relating to fair lending, credit reporting, privacy, marketing, payments, debt collection, electronic contracting, the Department of Education, vendor management, and unfair, deceptive or abusive acts or practices.
Her regulatory practice includes preparing clients for banking agency and CFPB compliance examinations, assisting with the development of new financial products and services, and drafting customer-facing disclosures and agreements.