September 19, 2022

CFPB Finds "Buy Now, Pay Later" Programs Pose Significant Risks to Consumers

Steven Lofchie Commentary by Steven Lofchie

In a new report, the CFPB identified "Buy Now, Pay Later" ("BNPL") credit program and product risks. (See also, previous coverage.) CFPB Director Rohit Chopra also provided extensive remarks accompanying the report.

The CFPB described BNPL as "a form of credit that allows a consumer to split a retail transaction into smaller, interest-free installments and repay over time." The CFPB highlighted the rapid growth and the diversification in BNPL programs and products and the competitive benefits of BNPL loans over legacy credit products.

In the report, the CFPB identified risks associated with BNPL products. These include:

  • "the lack of clear, standardized disclosure language" which may "obscure the true nature of the product as credit and make important information about loan terms, including when and how fees are assessed, and when payments are due, less accessible;"
  • that BNPL lenders are not following Regulation Z ("Truth in Lending Act") credit dispute resolution provisions;
  • that most lenders are requiring the use of autopay to "reduce collections costs and credit losses" and they make removing it "challenging or impossible." (The CFPB said that this "adversely limit[s] consumer choice and flexibility to elect or change payment methods.");
  • that lenders "re-present" fees associated with payment methods, multiple times causing "downstream impacts to consumers when those funds are unavailable to pay other obligations." The CFPB noted that consumers may be charged multiple late fees on the same transactions;
  • that lenders are "harvesting and monetizing consumer data across the payments and lending ecosystems" which "threaten consumers’ privacy, security, and autonomy"; and
  • that BNPL product structures contribute to two types of consumer "overextension": (i) "loan stacking" (when "a borrower takes out two or more concurrent BNPL loans from different lenders") and (ii) "sustained usage," (resulting in "habitual usage" that can lead to "delinquency or default"). (The CFPB stated that "BNPL lenders do not currently furnish repayment histories to the consumer reporting companies, which may compound overextension risks.")

In his remarks, Director Chopra stated that as a result of these findings, he directed staff to:

  • "identify potential interpretive guidance or rules to issue with the goal of ensuring that BNPL firms adhere to many of the baseline protections that Congress has already established for credit cards";
  • examine the demographic, transactional and behavioral data collected for uses outside of the lending transaction "for the purpose of sponsored ad placements, sharing with merchants, and developing user-specific discounting practices." (Director Chopra noted that the CFPB will "also be coordinating with the Federal Trade Commission, which launched a rulemaking process on commercial surveillance, and, if finalized, these rules will be enforceable by the CFPB in the financial services arena.");
  • develop options "on how the industry and consumer reporting companies can develop appropriate and accurate credit reporting practices";
  • ensure that BNPL companies "are subjected to appropriate supervisory examinations, just as credit card companies are"; and
  • ensure that "estimates [on] household debt burden reflects the reality of today’s market."

Commentary

The takeaway from the report and the Director's remarks is that the CFPB will likely seek expanded authority to regulate BNPL businesses.

There is some inherent irony in the fact that the U.S. regulators repeatedly criticize the limited availability of financial services to low-income individuals and simultaneously attack those firms that are providing such services. In fact, the report includes some good news about BNPL services, e.g., loan acceptance rates are up and profitability is down (which suggests increased competition). Further, it is hardly surprising that low-income individuals were borrowing more during the pandemic when so many lost their jobs in response to the flu and governmental actions. It's certainly not obvious how much of that increase in borrowing would be driven by BNPL.

The findings in the report are significant, but equal attention should be paid to the benefits of a credit product that has high rates of loan acceptance and that generally seems not to charge excessive fees, judging by the diminishing profitability of the business.

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