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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.
CFPB orders companies to submit BNPL information
On December 16, the CFPB issued a series of orders to five companies seeking information regarding the risks and benefits of the “buy now, pay later” (BNPL) credit model. BNPL is a “fast-growing” form of deferred payment that permits a consumer to divide a purchase into smaller installment payments, which are usually four or less and are often with a down payment of 25 percent due at the time of checkout. The Bureau issued the orders under Section 1022(c)(4) of the Consumer Financial Protection Act (12 U.S.C. § 5512(c)(4)), which, as part of the agency’s rulemaking authority, authorizes it to “monitor consumer financial markets and enables the agency to require market players to submit information to inform this monitoring.” The Bureau stated that it is “concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.” The Bureau expects to “publish aggregated findings on insights learned from this inquiry” and intends for the orders “to illuminate the range of these consumer credit products and their underlying business practices.”
The Bureau made available an example order that contains 20 requests seeking various information and data on several topics, including: (i) “Business Model/Metrics”; (ii) “Loan Performance Metrics”; (iii) “Consumer Protections”; (iv) “User Contacts and Demographics”; and (v) “Data Harvesting.” With respect to data harvesting, the CFPB noted that “[a]s competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability,” and the Bureau “would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers.” The Bureau also noted that as part of the inquiry, it is collaborating with Australia, Sweden, Germany, and the UK (specifically, the Financial Conduct Authority), and will additionally be coordinating with the rest of the Federal Reserve System, and its state partners.
The same day, the Bureau issued a blog post for consumers on common risks to be aware of before using a BNPL loan. The blog noted, among other cautions, that: (i) “BNPL products often carry fees”; (ii) “[y]our loan repayment agreement is with the BNPL lender rather than the retailer”; (ii) “BNPL loans have fewer protections than credit cards”; and (iii) “[m]ost BNPL lenders don’t report payments to the major credit reporting companies,” nor “generally perform hard credit inquiries when deciding whether or not to give you the loan.”
House fintech task force examines buy now/pay later industry
On November 2, the House Financial Services Committee’s Task Force on Financial Technology held a hearing titled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products,” urging regulators to examine the BNPL industry. The committee memorandum highlighted the rise in consumers products offered by fintechs, such as BNPL, earned wage access, and overdraft avoidance products, and warned that while these products may help consumers manage their personal cash flow, they also have the potential to create unsustainable levels of debt. FSC staff noted that many lending disclosure requirements, including those under TILA, may not apply to several of these products, thus creating concerns regarding consumers’ understanding of the associated risks. Pointing out that payments made on many of these products are not reported to credit bureaus, FSC staff raised the issue of whether consumers are missing out on opportunities to build credit.
The task force heard from several industry witnesses who discussed, among other things, current federal and state consumer protection regulations that apply to BNPL products. One witness stressed the importance of “balanced and thoughtful regulation” that benefits consumers and merchants using these new payment solutions, and noted that the industry is actively working with credit bureaus on ways to share repayment data. House Financial Services Chair Maxine Waters (D-CA) also urged the CFPB to “look[ ] deeply” at these emerging products to gain a better understanding of how they may impact low- and moderate-income consumers and borrowers of color. Representative Blaine Luetkemeyer (R-MO) noted, however, that these products “allow[] people to purchase products, [and] pay for them in a timely manner as they can afford them.” Representative Warren Davidson (R-OH) agreed, stressing that policymakers need to “avoid punishing new products for not fitting within regulatory buckets that were already built” and “should avoid overly impairing consumer choices on how they spend money.”
DFPI reports sharp decrease in consumer lending and PACE financing
On October 7, the Department of Financial Protection and Innovation (DFPI) released a report showing significant changes in consumer lending activity, likely attributable to a number of factors including the Covid-19 pandemic, state and federal financial assistance, student loan payment moratoriums, favorable interest rates, and increased reporting of alternative financing products. The 2020 annual report examined unaudited data gathered from finance lenders, brokers, and Property Assessed Clean Energy (PACE) administrators licensed under the California Financing Law, as well as new data from the “Buy Now, Pay Later” (BNPL) industry. Findings showed, among other things, a sharp decrease in certain types of consumer loans with BNPL products (often interest-free), decreasing overall by 41 percent in 2019. However, the report found that consumer loans, excluding BNPL, increased 94.8 percent during the same period—a result likely caused by an increase in originations of consumer loans secured by real estate. Finance lenders, including BNPL, originated nearly 12 million consumer loans in 2020 (a 530 percent increase over the prior year), with the top six BNPL lenders accounting for 91 percent of the total consumer loans originated in 2020. DFPI noted that a surge in BNPL unsecured consumer loans reported to the regulator shows that BNPL payment options are becoming increasingly popular. DFPI also discussed recent BNPL enforcement actions, which required companies to consider a consumer’s ability to repay a loan and subjected the companies to rate and fee caps.
The report also examined PACE financing data. According to findings, there was an 18 percent decline in the total number of PACE assessment contracts funded and originated in 2020, and a 30 percent decrease in gross income for PACE program administrators since 2019.