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CFPB studying BNPL growth

Federal Issues Agency Rule-Making & Guidance CFPB Buy Now Pay Later Privacy, Cyber Risk & Data Security Consumer Protection Consumer Finance Disclosures Fraud

Federal Issues

On September 15, the CFPB announced plans to consider issuing interpretive guidance or regulations to ensure that buy now, pay later (BNPL) lenders follow many of the same consumer protection measures that exist for credit cards. “We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan,” CFPB Director Rohit Chopra said in the announcement. The Bureau described BNPL products as a form of interest-free credit that “serves as a close substitute for credit cards” and allows consumers to split a retail transaction into smaller, interest-free installments that are repaid over time. 

Recognizing that BNPL products are a rapidly growing alternative form of credit for online retail purchases, the Bureau published a report providing key insights into the industry. According to the report, the number of BNPL loans originated from 2019 to 2021 in the US grew 970 percent, from 16.8 million to 180 million. The total dollar volume of these loans grew by 1,092 percent in that period, from $2 billion in 2019 to $24.2 billion in 2021, the report said, noting that 73 percent of applicants were approved for credit in 2021, up from 69 percent in 2020. Additionally, the report found that 89 percent of consumers using BNPL loans linked their accounts to their debit cards, and that late fee policies vary by issuer.

The Bureau raised several concerns with BNPL products in the report, including (i) inconsistent standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and occurrences where consumers are assessed multiple late fees on the same missed payment; (ii) risks related to data harvesting and monetization, as many BNPL lenders shift business models toward proprietary app usage, allowing lenders “to build a valuable digital profile of each user’s shopping preferences and behavior”; and (iii) concerns over consumers taking out several loans during a short period of time at multiple lenders. According to the Bureau, because most BNPL lenders currently do not furnish data to the major credit reporting companies, many lenders are unaware of a consumer’s current liabilities when deciding whether to originate new loans.

The Bureau noted in its announcement that while BNPL lenders are currently subject to some federal and state oversight, compliance and licensing requirements vary. In addition to exploring potential new regulatory guidance, the Bureau said it plans to identify surveillance practices that BNPL lenders should seek to avoid, and it will continue to address the development of appropriate and accurate credit reporting practices for the industry. Chopra further announced that the Bureau is inviting BNPL lenders to self-identify if they wish to be examined for any potentially problematic business practices. The Bureau is also reviewing its authorities to conduct examinations on a compulsory basis and will work with state regulators that license nonbank finance companies on examinations of BNPL firms.