InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FDIC reports lowest unbanked rate since start of survey
On November 12, the FDIC released its biennial survey of unbanked and underbanked households revealing that the unbanked rate in the U.S. fell to a historic low of 4.2 percent in 2023. This rate decreased from 4.5 percent in 2021 and marked a significant drop from a high of 8.2 percent in 2011. First conducted in 2009, the survey noted about 5.6 million households were unbanked in 2023.
The survey also highlighted that households consisting of minority groups continued to have higher unbanked rates compared to their counterparts. For the first time, the 2023 survey included questions about the use of Buy Now, Pay Later (BNPL) services, revealing that 3.9 percent of households used BNPL in the past 12 months.
CFPB publishes BNPL FAQs
On September 18, the CFPB issued Frequently Asked Questions (FAQ) guidance on Buy Now, Pay Later (BNPL) products. The FAQs are organized into three sections: (i) a general description of BNPL products and “Pay-in-Four” BNPL loans; (ii) scope and coverage of Pay-in-Four BNPL loans; and (iii) requirements for periodic statements for Pay-in-Four BNPL loans. In particular, the FAQs offer direction on how to apply Regulation Z to BNPL products, including the application of credit card periodic statement requirements to Pay-in-Four BNPL products accessed through digital user accounts. As previously covered by InfoBytes, the CFPB issued an interpretive rule in May, stating its position that certain consumer protection provisions of Regulation Z applied to BNPL accounts.
Senate Banking Committee pens support on CFPB’s proposed BNPL supervision
On September 10, Senators Jack Reed (D-RI), Sherrod Brown (D-OH) and Tammy Duckworth (D-IL) penned a letter expressing their support for a new interpretive rule by the CFPB classifying “Buy Now, Pay Later” (BNPL) providers as credit card issuers. As previously covered by InfoBytes, on May 22, the CFPB issued an interpretive rule stating that certain consumer protection provisions of Regulation Z apply to BNPL accounts, asserting that “digital user accounts” used to access BNPL credit are considered “credit cards” under Regulation Z. In their letter, the senators characterized the rule as an “important step toward clarifying the regulatory status of BNPL loans.”
In the letter, the senators reported 43 percent of BNPL users were behind on payments and 28 percent delinquent on other debts, which they concluded shows that BNPL users are at greater risk of financial distress compared to credit card holders. They argued that the new rule would help protect consumers by requiring BNPL providers establish uniform methods for calculating the cost of credit, provide meaningful disclosure of those costs to consumers, provide standardized mechanisms for resolving credit billing disputes, and provide periodic statements. The senators also called for the CFPB to initiate separate rulemaking to bring the largest BNPL providers under federal supervision. Finally, to better assess whether BNPL users face elevated levels of defaults or delinquencies, the letter urged the CFPB to publish current data on the state of the BNPL market and to update this information annually.
CFPB offers additional guidance for BNPL lenders during compliance transition
On August 16, the CFPB published a blog post on the CFPB’s approach to working collaboratively with the buy now pay later (BNPL) industry to develop an effective regulatory approach to BNPL loans. The blog post stated the CFPB was seeking to provide guidance to BNPL lenders to ensure that rules applied to BNPL lenders protected consumers while encouraging innovative technological or business practices by new market entrants. To this end, the CFPB issued an interpretive rule in May clarifying how federal laws like TILA and Regulation Z apply to BNPL loans (covered by InfoBytes here).
Following issuance of the interpretive rule, including the receipt of comments submitted in response to the interpretive rule, the CFPB reported that the BNPL industry has responded positively with many lenders working to comply with the clarified regulations. To provide additional guidance to lenders who are transitioning their systems to comply with the interpretive rule, the CFPB plans to release a set of FAQs next month, responding to questions received in comments and issued raised during the CFPB’s meetings with BNPL providers. Additionally, the CFPB stated that it will not seek penalties for rule violations during a BNPL’s lender compliance transition if lenders act “in good faith and expeditious manner” through the transition.
CFPB issues interpretive rule likening BNPL accounts to credit cards under Regulation Z
On May 22, the CFPB issued an interpretive rule stating its position that certain consumer protection provisions of Regulation Z applied to Buy Now, Pay Later (BNPL) accounts. The interpretive rule asserted that “digital user accounts” used to access BNPL credit are considered “credit cards” under Regulation Z.
According to the CFPB, BNPL “digital user accounts” fell within TILA and Regulation Z’s definition of a credit card because they qualified as an “other credit device” or “other single credit device.” The CFPB likened its interpretation of “credit device” to the Fed’s interpretation of “access device” in Regulation E, which included non-physical payment codes to initiate an electronic fund transfer. Further, the CFPB stated that because BNPL “digital user accounts” were usable “from time to time to obtain credit,” they met the definition of a “credit card” under Regulation Z.
As a result, the CFPB’s interpretive rule stated that entities issuing such accounts were “card issuers” and therefore “creditors” who are “broadly subject” to the regulations in Subpart B of Regulation Z. The interpretive rule noted that although Subpart B was entitled “Open-End Credit,” it nevertheless applied to closed-end BNPL credit issued through a digital user account if such credit was not subject to a finance charge and was not payable by written agreement in more than four installments. Subpart B included provisions applicable to, among other things, disclosures, consumer disputes, billing errors, and refunds.
The CFPB will request public feedback on the interpretive rule but will reserve the right to move forward without revisions if they are not warranted. The CFPB will submit a report with the interpretive rule to the Senate, the U.S. House, and the U.S. Comptroller General (head of the GAO) prior to the rule’s published effective date.
New York Fed Bank analyzes BNPL usage
On February 14, the Federal Reserve Bank of New York (NY Fed) published a blog post evaluating different households’ use of buy now pay later (BNPL) products, which it generally described as “loans that are payable in four or fewer installments and carry no finance charges.” To understand BNPL usage and its relationship with consumers’ financial situations, the NY Fed conducted a study which revealed distinct usage patterns between the financially fragile and the financially stable.
The study revealed that financially fragile individuals, or individuals who have a credit score below 620, who have been declined for a credit application in the past year, or who have fallen 30 or more days delinquent on a loan in the past year, typically use BNPL to make frequent small purchases when compared to financial stable individuals. The study also found that using BNPL often leads to repeat transactions, indicating a potential trend towards repeat use of the product, particularly among those facing credit challenges.
The study also found that consumers’ motivations for using BNPL differ. Financially stable individuals often cite zero interest as a key advantage, while the financially fragile prioritize ease of access and convenience. The NY Fed summarized that BNPL usage among financially fragile individuals resembles using a credit card for medium-size, out-of-budget purchases, while financially stable users tend to make fewer purchases with a focus of avoiding interest on high-priced items. The NY Fed noted, however, that there is evidence of misunderstanding among users, such as the belief that BNPL helps build credit, concluding that “those with this view may be better off using a credit card.”
New York Governor highlights NYDFS in 2024 State of the State proposal
On January 2, New York Governor Kathy Hochul revealed a proposed plan focused on consumer protection and affordability as the initial part of the Governor’s 2024 State of the State address. The plan includes changes to New York’s consumer protection laws, regulations for buy now pay later products, increased paid medical and disability leave benefits, measures to eliminate co-pays for insulin in specific insurance plans, and legislation addressing medical debt.
Changes to consumer protection laws would give the Attorney General more power to enforce the laws and help the state to address unfair and abusive business practices. Additionally, proposed legislation would require buy now pay later providers to obtain licenses and introduce regulations focusing on disclosure, dispute resolution, credit standards, fee limits, data privacy, and preventing excessive debt.
NYDFS also detailed Governor Hochul’s plan to update and broaden New York’s hospital financial assistance law to provide increased protection against medical debt. The proposed legislation aims to limit hospitals’ ability to sue low-income patients (earning less than 400 percent of the Federal Poverty Level) for medical debt and expand financial assistance programs. It also seeks to cap monthly payments and interest rates on medical debt while enhancing access to financial aid. This consumer protection and affordability plan builds on Governor Hochul and her administration’s efforts to make New York more affordable and livable.
OCC issues guidance on BNPL loans
On December 6, the OCC posted Bulletin 2023-37 to provide banks with guidance on Buy Now, Pay Later (BNPL) loans. The OCC defined BNPL as point-of-sale or “pay-in-4” installment loan products. The OCC noted that, if BNPL products are used responsibly, they “can provide consumers with a low-cost, short-term, small-dollar financing alternative to manage cash flow.”
The OCC emphasized that the banks should offer BNPL loans in accordance with standards for safety and soundness, treat customers fairly, provide fair access to financial services, and act in compliance with applicable laws and regulations. In the bulletin, the OCC highlighted the risks to banks associated with offering BNPL lending, including credit, compliance, operational, strategic, and reputational risks to banks. In particular, the bulletin also underscores the risks that borrowers may not fully understand their BNPL repayment obligations, the challenges of underwriting BNPL applicants who have limited or no credit history, the lack of standardized disclosure language, and the risks of merchant disputes, among other risks.
The OCC recommended banks consider risk management practices, such as maintaining “underwriting, repayment terms, pricing, and safeguards that minimize adverse customer outcomes” tailored to the unique characteristics and risks of BNPL loans. The bulletin also advised banks to pay close attention to “the delivery method, timing, and appropriateness of marketing, advertising, and consumer disclosures,” in particular to ensure that all such documents clearly disclose the borrower’s obligations and any fees that may apply.
2nd Circuit: Reverse and remand a buy-now-pay-later suit
On November 3, the U.S. Court of Appeals for the Second Circuit reversed and remanded a district court’s decision to deny a buy now pay later servicer’s (defendant) motion to compel arbitration in a class action. The plaintiffs alleged the defendant violated the Connecticut Unfair Trade Practices Act, among other things, after the defendant’s charges incurred overdraft fees on the plaintiff’s checking account. The defendant argued that the consumer agreed, on multiple occasions, to the mandatory arbitration provisions in the servicer’s terms and conditions when she used its services. The district court concluded that the plaintiff did not have “reasonably conspicuous notice of and unambiguously manifest assent to [defendant’s] terms” and therefore plaintiff was not bound by the mandatory arbitration provisions in the defendant’s terms.
The 2nd Circuit panel of three judges identified “several factors” in its finding that the plaintiff had reasonably conspicuous notice, including that defendant’s interface was “uncluttered” adding that “[a] reasonable internet user, therefore, could not avoid noticing the hyperlink to [defendant’s] terms when the user selects ‘confirm and continue’ on the [application].” Further, the court found that the plaintiff “unambiguously manifested her assent” to the defendant’s terms and conditions.
CFPB, EU start talks on AI, digital finance
On July 17, CFPB Director Rohit Chopra and Commissioner for Justice and Consumer Protection of the European Commission Didier Reynders issued a joint statement announcing the start of new dialogue on consumer financial protection with a primary focus on digital developments in the financial sector and ways to improve policy and regulatory cooperation.
Chopra and Reynders stressed that there are significant implications for both businesses and households from the digitalization of the financial services sector, including impacts on pricing, customer service, competition, and privacy. They noted that financial institutions are increasingly deploying automated decision-making processes, leveraging artificial intelligence technologies, and developing and introducing new financial products and services, such as Buy Now, Pay Later. Chopra and Reynders also commented that digital payments are becoming “increasingly offered and controlled by Big Tech.” They warned these developments, if not properly regulated, “could increase consumers’ exposure to fraud and manipulation, limit their product options over time, threaten their control over their own data, and force them to accept more expensive personalized pricing for the same products and services compared to other consumers.” Chopra and Reynders also cautioned that policymakers must do more to keep pace with evolving markets and ensure consumer protection.
The dialogue will address topics relating to:
- The deployment of automated decision-making and data processing and implications for consumers;
- Risks associated with emerging credit options, including the potential risks of over-consumption and over-indebtedness for consumers who use these products;
- Measures for exploring ways to assist over-indebted consumers in managing and repaying their debt sustainably;
- Digital transformation and access to fair financial services, including to unbanked and underbanked consumers, as well as those who prioritize protecting their personal data; and
- Competition, privacy, security, and financial stability implications associated with big tech companies that offer financial services.
Chopra and Reynders will meet informally at least once per year to share insights and experiences on consumer financial issues. According to the statement, the dialogue will also involve staff discussions, bilateral meetings with subject matter experts, and roundtables with stakeholders. The cooperation and exchanges within the informal dialogue are expected “to occur in parallel with other forms of cooperation and exchanges between the European Union and the United States on various digital and financial services policies and regulations,” the joint statement said.