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CFPB publishes BNPL borrower profiles
On March 2, the CFPB released a report examining the financial profiles of Buy Now, Pay Later (BNPL) borrowers using data pulled from the agency’s Making Ends Meet survey and its access to credit bureau data. The report follows previous Bureau research conducted on the BNPL market (covered by InfoBytes here). The Bureau observed that, while many BNPL borrowers used the product without any noticeable markers of financial stress, these borrowers (as compared to non-BNPL borrowers) were, on average, more likely to have higher credit card debt and utilization rates and were more likely to have revolving balances on their credit cards. BNPL borrowers also had lower credit scores and higher utilization rates of alternative financial services such as payday loans and pawn loans that charge high interest rates and were more likely to incur bank account overdrafts. The report noted, however, that while BNPL borrowers generally have access to traditional credit products, they are more likely to borrow using retail accounts, personal loans, student loans, and auto loans compared to non-BNPL borrowers (BNPL borrowers were more than twice as likely to be delinquent on at least one of those products by 30 days or longer). The Bureau commented though “that many of these differences pre-date [BNPL] use and [the report] highlights the need for further research into whether the products have any causal impact on consumer indebtedness.” Black, Hispanic, and female consumers are also more likely than average to use BNPL products, the report found, along with consumers with income between $20,001-$50,000.
Chopra says CFPB is examining industry standard settings
On November 2, CFPB Director Rohit Chopra delivered prepared remarks before a public meeting of the Bureau’s Consumer Advisory Board briefly touching upon on several topics related to the Buy Now Pay Later market, big tech and data collection, peer-to-peer payment platforms, and Section 1033 rulemaking concerning consumers’ rights to their personal financial data. Notably, Chopra raised an area of discussion concerning industry standard-setting organizations and providers of critical infrastructure. Recognizing that private organizations play a major role in setting standards across sectors of the economy, Chopra emphasized that “[d]ecentralized, open banking will likely rely on fair standard-setting, through an amalgam of legally binding rules and industry developed standards.” He warned though that it “can be difficult to achieve fair standard-setting, since incumbents will have a strong economic interest when it comes to protecting their turf.” Chopra pointed to the telecommunications and health care industries as areas where private organizations “are not neutral, but are instead owned or governed by certain market participants” and where other players may also integrate a function akin to a lobbying or trade association. Explaining that the Bureau has been devoting a lot of time to this space, Chopra said the agency is gathering insights into other countries’ experiences, such as the UK’s Open Banking Implementation Entity (which was established to provide critical services and infrastructure), as well as domestic developments. He stated the Bureau will develop rulemaking with a practical mindset of how requirements would be operationalized in the market.
CFPB studying BNPL growth
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.
DFPI enters into settlement with unlicensed point-of-sale lender
On August 3, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a Florida-based point-of-sale lender for allegedly engaging in the business of finance lending in California without obtaining a license. According to the settlement, after conducting an inquiry, DFPI determined that the company violated California Financial Code section 22100(a) “by making loans through the operation of buy now, pay later’ point-of-sale products” without obtaining a proper license. The company voluntarily agreed to the consent order, and, among other things: (i) agreed to desist and refrain from engaging in the business of a finance lender or broker in California unless/until it obtains a California Financing Law (CFL) license authorizing the company to conduct business as a finance lender or broker; (ii) must pay an administrative penalty of $2,500; and (iii) refund fees totaling $13,065. The company also agreed that it will only make loans, deferred payment products, and extensions of credit to California residents under the authority of a CFL license and in compliance with the statute.
CFPB highlights risks associated with BNPL products
On August 4, the CFPB released a report highlighting risks associated with new product offerings that the agency claimed blur the line between payments and commerce. The report examined the development of new capabilities—like “super apps,” buy now, pay later (BNPL), and embedded commerce—that have the potential to streamline payments, facilitate commerce, and enhance user experience, but may also create opportunities for companies to aggregate and monetize consumer financial data. With respect to “super apps,” the Bureau warned that these services have “morphed” into a “bank in an app” model, providing a “wide array of financial, payment and commerce functions within a single app.” These financial services super apps may seem to be more convenient than having multiple relationships with different organizations, the Bureau said, but cautioned that using these products may limit consumer product and service choice. “While consumers can opt to use a payment offering outside an app, such super apps create the potential for providers to steer consumers to specific solutions and/or limit access to some products.”
The report also raised concerns about tech firms offering their own lending or BNPL products. The Bureau pointed out that BNPL options, which provide unsecured short-term credit allowing consumers to split purchases into four equal interest-free payments at the point of sale, have “soared in recent years” as a popular alternative to credit cards. The Bureau noted it is “carefully focused on the shift toward real-time payments in the United States,” and is “seeking to mitigate the potential consequences of large technology firms moving into this space.”
The Bureau further stressed it is “carefully monitoring the payments ecosystem as part of a multifaceted effort to promote fair, transparent, and competitive markets for consumer financial services,” and said it is currently working on Dodd-Frank Act rules that would give consumers more control over the personal financial data that they choose to share with finance and payment apps. The Bureau also stated that it is “assessing new models of lending integrated with payments and ecommerce, such as BNPL,” and plans to issue a report on its findings and make a determination as to whether any regulatory interventions are appropriate. Last year, the Bureau issued a series of orders to five companies seeking information regarding the risks and benefits of the BNPL credit model (covered by InfoBytes here).
CFPB says BNPL needs standardized credit reporting
On June 15, the CFPB published a blog post calling on the Buy Now Pay Later (BNPL) industry to establish standardized codes and formats for furnishing information to credit reporting agencies that take into account the unique characteristics of these short-term, no-interest consumer credit products. Citing to the rapid growth within the BNPL industry, the Bureau stressed the need for standardization in how BNPL debts are reported on consumers’ credit reports. According to the Bureau, the three major credit reporting agencies have different policies for handing positive and negative reports on BNPL transactions in consumers’ core credit files. Moving to a more standardized approach would “facilitate the consistent and accurate furnishing of BNPL payment information” the Bureau said, noting that the agency “believes that when BNPL payments are furnished it is important that lenders furnish both positive and negative data.” Consumers who pay on time and may be seeking to build credit should receive the benefits of making timely payments on their BNPL debts, the Bureau said, explaining that this may also impact lenders seeking to understand how much debt a consumer is carrying.
The Bureau stressed it will continue to monitor the progress of BNPL lenders, credit reporting agencies, and credit scoring companies, and said it plans to “revisit this issue as part of a broader report on the industry stemming from our market monitoring order and responses to a public request for comments.” The Bureau is currently conducting an industry review, which includes a series of orders sent last December to five companies seeking information on the risks and benefits of the BNPL credit model (covered by InfoBytes here).
CFPB handled nearly 1 million consumer complaints in 2021
On March 31, the CFPB published its Consumer Response Annual Report for 2021, providing an overview of consumer complaints received by the agency between January 1 and December 31, 2021. According to the report, the Bureau handled approximately 994,000 consumer complaints last year. Among other trends, the agency found that complaints about credit or consumer reporting continue to increase, accounting for more than 70 percent of all complaints received last year. Debt collection complaints are also increasing, accounting for more than 10 percent of all complaints. Consumers also reported difficulties with financial institutions failing to adequately address consumer complaints, giving consumers the runaround, and described issues with reaching companies to raise concerns about digital assets, mobile wallets, and buy-now-pay-later credit. The Bureau noted that during the second year of the Covid-19 pandemic, complaint data showed that the volume of complaints from consumers struggling to pay their mortgages is increasing as borrower protections have expired. While complaints related to vehicle loans have also increased, the Bureau reported that student loan complaints remain lower than pre-Covid levels due to the implementation of temporary relief programs. The top products and services—representing approximately 94 percent of all complaints—were credit or consumer reporting, debt collection, credit cards, checking or savings accounts, and mortgages. The Bureau also received complaints related to money transfers and virtual currency; vehicle finance; prepaid cards; student, personal, and payday loans; credit repair; and title loans.
State AGs urge CFPB to prioritize consumers during inquiry into BNPL industry
On March 25, a coalition of state attorneys general, led by Illinois Attorney General Kwame Raoul, announced that they are urging the CFPB to ensure that “buy-now-pay-later” (BNPL) lenders are not engaging in practices that trap consumers in a cycle of debt. As previously covered by InfoBytes, in December 2021, the CFPB issued a series of orders to five companies seeking information regarding the risks and benefits of the BNPL credit model. In the letter, the state AGs requested that the CFPB prioritize robust consumer protections during its review of the BNPL loan industry, and noted that they are concerned that BNPL loans and services appeal to borrowers who already struggle to make ends meet or owe on other debts. The letter also noted the AGs’ concern that BNPL lenders can designate their loans to evade federal and state consumer protection and credit laws, and may not adequately disclose lending and repayment terms. The letter also pointed out that, like predatory lending products, BNPL loans may contain terms and features that are known to trap people in cycles of debt. Among other things, the state AGs urged the Bureau to: (i) explore “whether and how BNPL providers ensure consumer rights and protections, disclosure of fees, charges, and other essential terms to consumers, as well as how they comply with general requirements to refrain from unfair, deceptive, and abusive acts and practices”; (ii) assess “what steps, if any, BNPL providers take in considering ability-to-repay and the types and sources of information they rely on”; (iii) study “the emerging role of credit bureaus in the BNPL marketplace”; (iv) monitor partnerships “between BNPL providers and for-profit schools and online course providers” and “consider issuing guidance and rulemaking clarifying regulations for BNPL credit to finance education”; and (v) review the policies, procedures, and practices of BNPL providers regarding debt collection “to ensure that providers comply with all applicable consumer protections.”
Chopra highlights consumer protection topics
On February 10, CFPB Director Rohit Chopra answered questions during a Washington Post Live session on several consumer protection topics. Citing auto lending as a top concern for the Bureau, Chopra noted that it is important for consumers to be able to shop around, refinance loans, and navigate a competitive market. He also discussed recent Bureau initiatives related to junk fees and overdraft/insufficient funds fees, and said the Bureau intends to sharpen its supervisory scrutiny in these spaces. Chopra stated that, as part of a fair and competitive market consumers want to know when they are being charged these fees, noting that financial institutions have started to transition away from dependency on these types of fees and instead implement programs that will allow a bank to determine what shortfall they will allow on an individual consumer basis. He added that the Bureau may eventually see if rulemaking will increase competition and upfront pricing.
Chopra also discussed the role agencies play in the future regulation of cryptocurrency. He noted that while most of the cryptocurrency market is currently related to speculative trading, this could change if one of the big tech payment platforms decides to expand its services to cryptocurrency. Chopra highlighted several concerns, including how payment data from these systems will be used, how money will be transacted, and how consumers will report fraud. He stated that the Bureau is closely monitoring this space and any regulation will be an interagency effort. While Chopra also discussed the need for transparency with respect to how big tech companies are tracking, monetizing, and harvesting consumer data, he stated it is too early to tell whether there is a need for rulemaking in this area. Chopra also discussed topics related to the buy-now-pay-later industry and student lending, and stated that the Bureau is monitoring both areas carefully.
CFPB seeks comment on BNPL inquiry
On January 24, the CFPB issued a notice and request for comment in the Federal Register regarding the Bureau’s inquiry into “buy now, pay later” (BNPL) providers. As previously covered by InfoBytes, in December, the Bureau issued a series of orders to five financial technology companies seeking information regarding the risks and benefits of the BNPL credit model. According to the notice, the Bureau seeks to obtain information from “any interested parties” on “the size, scope, and business practices of the BNPL market” to assist the Bureau in understanding “how consumers interact with BNPL providers, and how BNPL business models impact the broader e-commerce and consumer credit marketplaces.” Comments are due by March 25.
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