Consumer protections

(a) Preventing unfair and deceptive private educational lending practices and eliminating conflicts of interest Section 140 of the Truth in Lending Act (15 U.S.C. 1650) is amended— (1) in subsection (a)(8)— (A) in subparagraph (A)(ii), by striking and at the end; and (B) by adding at the end the following: (C) includes an Outcomes-Based Financing Product as defined in subsection (h); and; and (2) by adding at the end the following: (h) Definitions relating to outcomes-Based financing products In this chapter: (1) Amount financed The term amount financed means, with respect to an OBF product, the amount financed as calculated pursuant to section 1026.18(b) of title 12, Code of Federal Regulations. (2) Income threshold The term income threshold means a fixed dollar amount that is the minimum income that an OBF recipient is required to earn in a payment period before the OBF recipient is required to make a payment on an OBF product for such payment period. (3) OBF duration (A) In general The term OBF duration — (i) means the maximum time during which a consumer could remain obligated on the OBF product, except for any past due amounts owed to the OBF provider; and (ii) does not include— (I) any period of in-school deferment; (II) any grace or transition period; and (III) any period for which the OBF recipient's income is equal to or above the income threshold but the obligation is suspended at the request of the consumer (including a period of payment relief pause, deferment, or forbearance). (B) Reconciliation process If an OBF product requires a reconciliation process under section 128(e)(12)(A)(ii)(IV)(gg), any payment period that has not yet been reconciled shall provisionally be applied to the OBF duration until such time as the payment period is reconciled, provided that if the OBF recipient has reached the OBF duration, including any provisional payment periods, the OBF recipient shall not accrue any additional obligations except those that come from any remaining reconciliation processes. (4) OBF product The term OBF product means a financial product— (A) under which— (i) the OBF provider credits or advances financing to the OBF recipient or to a third party on behalf of the OBF recipient; or (ii) if the OBF provider is a merchant financing the sale of goods or services to the OBF recipient via the financial product, the OBF provider credits the amount financed toward the purchase of such goods or services; (B) under which the OBF recipient is obligated to make periodic OBF payments (if any become due) to the OBF provider in the future, calculated based upon the OBF recipient’s future income (using the Payment Calculation Method defined in this subsection, as specified in the contract); (C) under which the OBF recipient’s obligation to make payments (if any become due) to the OBF provider is conditional on the OBF recipient’s income exceeding the income threshold set in the OBF product; (D) under which there is an OBF duration after which the obligation is complete regardless of how much has been paid, as long as the consumer has paid any prior amounts due; (E) under which the OBF provider and the OBF recipient enter into an agreement that, as of the date of the product, includes each element described in subparagraphs (A) through (D); (F) that is not made, insured, or guaranteed under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.); (G) that is not open end credit or any loan that is secured by real property or a dwelling; and (H) under which the amounts advanced under subparagraph (A) are for— (i) costs associated with a postsecondary training program or any other program designed to increase the human capital, employability, or earning potential of the OBF recipient (not limited to programs eligible to participate under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.)); (ii) any personal expenses (such as books, supplies, transportation, and living costs) incurred by the OBF recipient while enrolled in a program described in clause (i); (iii) any other cost or expense that is a qualified higher education expense, as defined in section 529(e)(3)(A) of the Internal Revenue Code of 1986; and (iv) the refinancing of loans or OBF products used for the purposes described in clauses (i), (ii), or (iii), and without respect to whether the OBF product is provided by the educational institution that the OBF recipient attends. (5) OBF maximum number of payments The term OBF maximum number of payments — (A) means the maximum number of OBF payments that an OBF recipient could be required to make under the terms of the OBF product; and (B) does not include periods of payment relief pause. (6) OBF payment The term OBF payment — (A) means the amount of an OBF recipient’s periodic payment obligation, under the terms of the OBF product, incurred during any payment period for which the OBF recipient’s income is greater than the income threshold; and (B) is calculated using the OBF payment calculation method. (7) OBF payment calculation method OBF payment calculation method means the mechanism, formula, percentage, dollar figure, or other means of calculating an OBF recipient's payment obligation, based on the OBF recipient's income, under the terms of the OBF product. (8) OBF provider The term OBF provider means a person that provides financing to an OBF recipient pursuant to the terms of an OBF product, or, in the case of a person who is a merchant financing the sale of goods or services to the OBF recipient, the merchant. (9) OBF recipient The term OBF recipient means a consumer that receives financing from an OBF provider under an OBF product. (10) Outcomes-based loan The term outcomes-based loan means an OBF product that uses promissory notes, loan agreements, or an installment sales contract to effectuate the loan and provide for the repayment of a principal balance with a fixed or variable interest rate, with such additional terms as necessary (such as forgiveness of outstanding balance after a defined period) to meet the requirements of an OBF product. (11) Outcomes-based payment agreement An outcomes-based payment agreement includes all OBF products that are not outcomes-based loans. (12) Payment relief pause The term payment relief pause means a period of time that— (A) is requested by the OBF recipient during which any payment obligation the OBF recipient would have is suspended; and (B) does not count toward an OBF recipient’s OBF duration or maximum number of payments. (13) Poverty line The term poverty line has the meaning given the term in section 673 of the Community Services Block Grant Act (42 U.S.C. 9902). (14) Consumer The term consumer means a natural person to whom an OBF product is offered or extended for personal, family, or household purposes. (i) Additional consumer protections relating to OBF products (1) Prohibition on acceleration; treatment of early completion mechanisms (A) Limits on acceleration (i) Outcomes-based payment agreement products An OBF provider shall not include any mechanism in an outcomes-based payment agreement product that accelerates an amount against an OBF recipient (or otherwise liquidates a future payment stream) in the event of a delinquency or default under the OBF product. (ii) Outcomes-based loan products An OBF provider shall not accelerate (or otherwise liquidate a future payment stream) an outcomes-based loan product in the event of a delinquency or default under the outcomes-based loan, except the OBF provider may accelerate an outcomes-based loan in cases where the OBF recipient has failed to make a required payment for a continuous period of not less than 180 days. (B) No impact on early completion mechanisms Nothing in this subsection shall be interpreted to prevent an OBF recipient from using any available completion mechanisms of an OBF product so long as the mechanism is optional and within the OBF recipient’s control. (2) Monthly payment affordability for OBF products (A) Maximum monthly payment obligation Each OBF product shall specify the OBF payment calculation method applicable to the OBF product. An OBF provider shall not enter into an OBF product with an OBF recipient if the OBF recipient would be committing to pay more than 20 percent of the OBF recipient’s income at any time during the OBF duration, based on information available to the OBF provider at the time of the projection, inclusive of any payment obligations that the OBF provider knows will arise in the future for other OBF products upon which the consumer is obligated at the time of the projection. The OBF provider shall confirm a recipient’s OBF liabilities through a verifiable third-party source. At a minimum, the OBF provider shall confirm such liabilities using information maintained by a nationwide consumer reporting agency, as defined in section 603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)). While doing so is sufficient for meeting the requirement under this subparagraph, nothing in this subparagraph shall prohibit an OBF provider from using other sources to provide additional verification. (B) Calculation methodology and requirements (i) In general For the purposes of calculating the portion of an OBF recipient’s future income that would be consumed by the OBF product for which the OBF recipient has applied and all other OBF products of the OBF recipient as of the date of the agreement, the OBF provider shall calculate the aggregate future burden— (I) in any case where the income threshold of the OBF product is less than the maximum described in clause (ii), at hypothetical future income levels ranging from such income threshold to such maximum, in increments of $10,000; and (II) in any case where the income threshold of the OBF product is equal to or greater than such maximum, at such income threshold. (ii) Maximum The maximum described in this clause shall be the greater of— (I) (aa) for fiscal year 2025, $70,000; or (bb) for fiscal year 2026 and each subsequent fiscal year, the maximum for the preceding fiscal year— (AA) increased by the percentage increase in the Consumer Price Index for All Urban Consumers published by the Department of Labor; and (BB) rounded to the nearest $1,000; or (II) in the case of an OBF recipient who has (as of the date of the OBF agreement), or has applied for, an OBF product that uses a schedule of income percentages or a schedule of fixed amounts as the OBF payment calculation method, the highest income level referenced by a schedule for any such OBF product. (iii) Calculation (I) In general The terms of an OBF product for which a consumer has applied cannot cause the OBF recipient’s aggregate future burden (defined as the total amounts expected to be due under all OBF products of the OBF recipient as of the date of the agreement, and all OBF products for which the consumer is applying) to exceed the limit described in subparagraph (A) at any of the income increments described in clause (ii). (II) Calculation method For the purpose of calculating the percentage burden of an OBF product at a given future income level, the OBF provider shall calculate the annual payment obligation the OBF recipient would incur at that income level (using the most affordable option that would yield the lowest monthly payments that would be available to the OBF recipient at such income level under that OBF product) and divide that annual payment obligation by that income level. (C) Protections during periods of low earnings (i) In general The OBF product shall provide that when an OBF recipient has an income that is below the income threshold of the OBF product, the OBF periodic payment obligation is $0. (ii) Threshold amount The income threshold for an OBF product (expressed as an annual amount) shall be not less than 250 percent of the Federal poverty guidelines for a single person in the continental U.S. (for the year in which the calculation is performed). (3) Ensuring appropriate risk sharing for OBF products (A) In general An OBF provider may not contract for terms of an OBF product that would result in the OBF recipient having income that is less than or equal to 350 percent of the Federal poverty guidelines for a single person in the continental United States for the OBF duration being required to make a stream of OBF payments that would yield an effective annual percentage rate of more than 8 percent, plus the high yield of the 10-year United States Constant Maturity Treasury Notes auctioned at the final auction held before the current calendar year in which an OBF product offering is made. (B) Calculation An OBF provider shall calculate for an OBF recipient the effective annual percentage rate under subparagraph (A) by determining the poverty line at the time of origination of the OBF product and assuming such amount is fixed through the OBF duration. (C) Duration For the purposes of determining OBF duration under subparagraph (A), an OBF provider shall assume the OBF duration started after a period equal to the expected length of the program for which a consumer is enrolling. (4) Limits on duration of an OBF product obligation (A) OBF maximum number of payments The OBF maximum number of payments shall not exceed 240 monthly payments. (B) OBF duration The OBF duration shall not exceed 360 months (except in the case of an extension requested by the OBF recipient). (5) Non-interference An OBF product shall not be construed to give the contract holder any rights over an individual’s actions other than as provided in this Act. (6) Discharge protections for OBF recipients (A) Permanent and total disability In any case where an OBF recipient would be deemed totally and permanently disabled for purposes of benefits administered by the Department of Veterans Affairs or the Social Security Administration (determined without regard to whether the recipient receives such benefits), all further obligations of the OBF recipient under the OBF product shall terminate, except those accruing before the date such a determination would apply. (B) Death Upon the death of an OBF recipient, all further obligations of the OBF recipient under the OBF product shall terminate, except those obligations accruing before the OBF recipient’s date of death. (7) Limitation on amounts treated as income under OBF products (A) In general For purposes of calculating the obligation of an OBF recipient to make OBF payments under an OBF product, the income of the OBF recipient shall not include— (i) the income of any child or dependent of the OBF recipient; (ii) any item of income which is not included in the gross income (as defined in section 61(a) of the Internal Revenue Code of 1986) of the OBF recipient; (iii) any amount received from an individual retirement plan (as defined in section 7701 of the Internal Revenue Code of 1986), a pension, or an annuity; or (iv) any Social Security benefit (as defined in section 86 of the Internal Revenue Code of 1986). (B) Estimating income (i) In general An OBF provider may reasonably require that an OBF recipient provide documentation of income, including through pay stubs, tax transcripts, or the signing of relevant IRS forms that provide the OBF provider with access to the OBF recipient’s tax transcripts. In the event that an OBF recipient fails to provide income documentation as reasonably required by the OBF product, an OBF provider may assign an amount of income to the OBF recipient and compute the monthly payment amount for the OBF recipient by any of the following methods, to the extent disclosed in the OBF product: (I) Assigning an income amount obtained from a reasonably reliable third party or a consumer reporting agency, as defined in section 603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)). (II) If the OBF recipient previously provided income documentation or has had an income assigned in the preceding 1-year period, assuming that such income has increased by not more than 10 percent, provided such increase is not applied more than once per 1-year period. (III) Contacting the applicable State revenue department or the Internal Revenue Service to obtain the most recent information available about the income of the OBF recipient. (IV) If the OBF recipient has not previously provided income documentation, assigning a reasonable qualified income based on— (aa) the median income for individuals working in the profession for which the educational program of the OBF recipient was intended to prepare the OBF recipient, as determined by information published by the Bureau of Labor Statistics or other reasonably reliable publicly available data sources; or (bb) the median income of individuals who attended the same or a reasonably comparable covered educational program or course of study, as determined by information published by the Bureau of Labor Statistics or other reasonably reliable publicly available data sources. (V) Assigning an income equal to the income threshold of the OBF product (and adjusting as needed if the threshold adjusts over time). (ii) Notification If an OBF provider assigns an income to an OBF recipient, pursuant to clause (i), the OBF provider— (I) shall notify the OBF recipient in the monthly billing statement, and in each billing statement thereafter while the assigned income remains applicable to the OBF recipient— (aa) that income has been assigned; and (bb) of the rights of the OBF recipient under this section; (II) in any tax year for which the OBF provider has made an assumption about an OBF recipient’s income using any of the methods described in clause (i) and if the OBF recipient has authorized ongoing access to the OBF recipient’s return information under section 401, shall request such information in each year of the payment term; (III) if the OBF recipient does provide income information as reasonably required by the OBF product within 1 year of the date on which the OBF provider notified the OBF recipient that assigned income shall be applied to the OBF product or if the OBF provider receives updated income information through return information authorized under section 401, then, not later than the date that is 15 days after the date on which the OBF provider receives such information, shall— (aa) update each prior instance in which assigned income was applied, using such new income information; and (bb) reconcile any difference in amounts owed by the OBF recipient based on those updates to prior income; and (IV) if the OBF recipient provides income information more than 1 year after the OBF provider first assigned income to the OBF recipient, may, but shall not be obligated to, update each prior instance in which assigned income was applied using the income information provided by the OBF recipient. (iii) Records retention An OBF provider that assigns income to an OBF recipient shall retain all applicable records relating to the method and data sources used to make such estimation for a period of 3 years after the date by which there no longer exists a contractual relationship between the OBF provider and the OBF recipient for that OBF product. (8) No assignment of wages (A) In general An OBF provider may not take an assignment of earnings or wages of the OBF recipient as payment or as security for payment of a debt arising out of an OBF product. An assignment of earnings in violation of this paragraph is unenforceable by the assignee of the earnings and revocable by the consumer. This paragraph does not limit the ability of the OBF recipient to voluntarily elect to use a revocable payroll deduction mechanism, such as one offered by an employer or payroll provider, provided that the OBF recipient is not assigning the OBF recipient's earnings or wages. (B) Deemed loan A sale of unpaid earnings made in consideration of the payment of money to or for the account of the seller of the earnings is deemed to be a loan to the seller secured by an assignment of earnings.” (j) Treatment of Outcomes-Based Financing Products Under Other Laws (1) Definition In this subsection, the term State law — (A) means— (i) 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 (ii) any law of the United States applicable only to the District of Columbia; and (B) does not impact the use of such term in section 1026.28 of title 12, Code of Federal Regulations. (2) Insurance and wagering An OBF product shall not be treated as a contract for insurance, or as a betting or wagering contract, under any Federal or State law or State constitutional provision. (3) Assignment of future wages for OBF products An OBF product shall be a valid, binding, and enforceable contract, notwithstanding any State law or State constitutional provision limiting or otherwise regulating assignments of future wages or other income. (4) Preemption of State laws with respect to substantially equal payments A State law or State constitutional provision requiring that payments on a debt, credit, loan, installment sale, or other financial instrument be in equal or substantially equal amounts shall not apply to an OBF product. (5) Preemption of State laws with respect to ability to repay (A) In general A State law or State constitutional provision imposing requirements relating to assessing whether a consumer has the ability to repay a loan, credit, debt, installment sale, or other financial obligation shall not apply to an OBF product. (B) Exceptions (i) Legislation that references this section For purposes of the affordability protections specified in subparagraph (C), State legislation that specifically and explicitly addresses OBF products by reference to this section and imposes limits that would apply to OBF products issued in the jurisdiction of that State shall not be subject to preemption under subparagraph (A). (ii) Prior enacted legislation If, as of the date of enactment of this section, a State has previously enacted legislation or issued a rule specifically referencing income share agreements and specifying limits for income share agreements consistent with clauses (i) and (ii) of subparagraph (C), such limits are not subject to preemption under subparagraph (A). (C) Affordability protections The affordability protections subject to State specification under subparagraph (A) include: (i) the percentage specified in subsection (i)(2)(A) setting the maximum percentage of income required for monthly payments under OBF products, including what types of obligations are included in such limit (but not altering the methodology used to apply such limit); (ii) the percentage specified in subsection (i)(2)(C) providing an alternative minimum required income threshold (but not altering other aspects of the calculation used to determine the minimum income threshold). (6) Preemption of state laws with respect to amount of financing, timing of payments, and length of term (A) In general A State law or State constitutional provision imposing requirements relating to limits on amount of financing, timing of payments, or when payments must start for a loan, credit, debt, installment sale, or other financial obligation shall not apply to an OBF product. (B) Exceptions (i) Legislation that references this Section For purposes of the payment and duration protections specified in subparagraph (C), State legislation that specifically and explicitly addresses OBF products by reference to this section and imposes limits that would apply to OBF products issued in the jurisdiction of that State shall not be subject to preemption under subparagraph (A). (ii) Prior enacted legislation If, as of the date of enactment of this section, a State has previously enacted legislation or issued a rule specifically referencing income share agreements and specifying limits for income share agreements consistent with clauses (i) and (ii) of subparagraph (C), such limits are not subject to preemption under subparagraph (A). (C) Payment and duration protections The payment and duration protections subject to State specification under subparagraph (A) include: (i) the number specified in subsection (i)(4)(A) setting the maximum number of OBF payments for an OBF product (but not altering the definitions of OBF payment); (ii) the number specified in subsection (i)(4)(B) setting the maximum OBF duration for an OBF product (but not altering the definition of an OBF duration). (7) Prepayment (A) In general A Federal law or State law or State constitutional provision imposing requirements or limitations relating to prepayment or fees or charges related to prepayment, including as described in subsection (e), shall not apply to an outcomes-based payment agreement. (B) Exceptions (i) Legislation that references this Section State legislation shall not be subject to preemption under subparagraph (A) if the legislation— (I) specifically and explicitly addresses OBF products by reference to this section; and (II) requires that outcomes-based payment agreement products include a means through which an outcomes-based payment agreement recipient can complete the outcomes-based payment agreement obligation by paying an amount equal to the amount financed and an earned finance charge, with the earned finance charge equal to the finance charge that would have been earned by the outcomes-based payment agreement provider applying a maximum annual percentage rate (which shall be disclosed by the outcomes-based payment agreement provider pursuant to section 128(e)(12)(A)(ii)(III)) to the amount financed, and calculated as of the current date. (ii) Prior enacted legislation If, as of the date of enactment of this section, a State has previously enacted legislation or issued a rule specifically referencing income share agreements and specifying limits for income share agreements consistent with those described in this paragraph, such limits are not subject to preemption under subparagraph (A). (8) Application of usury limits (A) In general A State law or State constitutional provision imposing requirements or limitations relating to the rate or amount of interest, finance charges, or other charges which may be charged, taken, received, or reserved, shall not apply to an OBF product. (B) Exceptions (i) Legislation that references this section State legislation shall not be subject to preemption under subparagraph (A) if the legislation— (I) specifically and explicitly addresses OBF products by reference to this section; and (II) imposes its own limits with respect to the rate or amount of interest, finance charges, or other charges that may be charged, taken, received, or reserved that would apply to OBF products issued in the jurisdiction of that State. (ii) Prior enacted legislation If, as of the date of enactment of this section, a State has previously enacted legislation or issued a rule specifically referencing income share agreements and specifying limits for income share agreements consistent with those described in this paragraph, such limits are not subject to preemption under subparagraph (A). (9) State specification of risk sharing limits For the protections relating to risk sharing specified in subparagraph (B), a State may enact legislation that specifically and explicitly addresses OBF products and imposes its own limits that would apply to OBF products issued in the jurisdiction of that State that include the income level and associated annual percentage rate limit specified in paragraph (i)(3), including specifying additional tiers of income levels and limits as desired (but not altering the methodology used to apply such limits under this section)..