CFPB Signals Increased Regulation of Buy Now, Pay Later Products

After analyzing public feedback, as well as information gathered from the five providers of Buy Now, Pay Later (BNPL) products, the Consumer Financial Protection Bureau (CFPB) issued a report, making it clear that the CFPB plans to increase regulation of the BNPL industry.

A form of credit that allows a consumer to split a retail transaction into smaller, interest-free installments and repay over time, the typical BNPL structure divides a $50 to $1,000 purchase into four equal installments. While BNPL credit is interest-free, providers make money by charging fees to both sellers and consumers who don’t pay on time. Launched in the mid-2010s as an alternative form of short-term credit for online retail purchases, BNPL loan usage increased ten-fold during the pandemic.

Among other takeaways from the report, the CFPB found:

• The financial and operational benefits of the interest-free, accessible at your fingertips product over legacy credit products are real and sizeable. According to the CFPB, however, those same benefits may lead to two forms of borrower overextension: loan stacking (the risk of overconsumption from BNPL usage at multiple concurrent lenders) and sustained usage (the risk of long-term BNPL usage causing stress on borrowers’ ability to meet other, non-BNPL financial obligations).
  
  
• Consumer reporting companies have been slow to develop credit reporting protocols with respect to BNPL. Mortgage and auto lenders have raised concerns that the growth of BNPL with no associated credit reporting makes it more challenging to know whether a borrower can afford a mortgage or auto loan.
  
  
• Credit performance is deteriorating on BNPL loans. In 2020, 2.9% of borrowers “charged off” a BNPL loan, while that number jumped to 3.8% in 2021. Public filings show this upward trend continuing through the first half of 2022.
  
  
• BNPL lenders often collect a consumer’s data, as well as deploy models, product features, and marketing campaigns based on that data, to increase the likelihood of incremental sales. The CFPB claims that in addition to the general data harvesting risks, BNPL lenders’ use of consumer data for revenue-generating purposes can potentially increase overextension risks by engendering repeat usage.

Director Chopra also released prepared remarks on the report, acknowledging both the advantages and disadvantages of this new product. “Since taking office, I have directed our staff to identify ways to invite more competition into markets for consumer financial products and services. Buy Now, Pay Later firms are challenging existing players and offering new options to retailers and borrowers.” Director Chopra noted, however, that “[m]any Buy Now, Pay Later lenders are not offering the same clear set of dispute protections that credit card issuers have long been required to offer, which is creating chaos for some consumers when they return their merchandise or encounter other difficulties. Many Buy Now, Pay Later lenders do not offer clear and comparable disclosures of the terms of the loan like other lenders.”

The report and prepared remarks state actions the CFPB intends to take as a follow up to the report. These includes:

• Identifying potential interpretive guidance or rules to issue to ensure that BNPL firms adhere to many of the baseline protections that Congress has already established for credit cards.
  
  
• Identifying data surveillance practices that may need to be curtailed — specifically, examining some of the types of demographic, transactional, and behavioral data collected for uses outside of the lending transaction, including for the purpose of sponsored ad placements, sharing with merchants, and developing user-specific discounting practices.
  
  
• Identifying options for appropriate and accurate credit reporting on these products.
  
  
• Ensuring that BNPL companies are subjected to appropriate supervisory examinations, just like credit card companies.
  
  
• Ensuring that the CFPB and the Federal Reserve System methodology used to estimate household debt burden reflects the reality of today’s market.

Director Chopra’s statement noted that “the report prepared by the CFPB staff does not seek to determine whether the rise of the Buy Now, Pay Later market is a positive or negative development. I believe that Buy Now, Pay Later can grow and serve consumers well if we can collectively address some of the gaps I’ve just outlined. If Buy Now, Pay Later lenders incorporate the protections and protocols that we observe in other financial products, this would go a long way to ensure that there is healthy competition where consumers have a baseline level of protections.”

The CFPB’s report denotes the latest action taken to reign in the burgeoning BNPL industry. As we posted here, here, and here, in November 2021, the House Financial Services Committee’s Task Force on Financial Technology held a “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products” hearing. For the hearing, the task force invited both consumer advocates and industry tradespeople to address concerns that these products are designed in such a way that the disclosure requirements under the Truth in Lending Act and other credit laws may not apply. Next, in December 2021, the CFPB ordered five BNPL companies to answer a series of questions about the products. In January 2022, the CFPB then issued a notice and request for comment related to the products. In response, the Consumer Bankers Association sent a letter to the CFPB in March 2022, encouraging regulation of the industry.

According to Director Chopra, “As BNPL products continue to grow in popularity and the industry continues to add products and services to meet consumer need, a measured approach to regulation will be necessary to preserve market options and to protect consumers’ interests.”