Buy Now, Pay Later: The Consumer Financial Protection Bureau’s Efforts to Regulate the Emerging Alternative to Consumer Credit Cards | Saul Ewing Arnstein & Lehr LLP

What do you want to know:

  • The Consumer Financial Protection Bureau (“CFPB”) is the primary federal regulator of the consumer lending industry.
  • In recent years, the CFPB has observed an increase in buy now, pay later (“BNPL”) consumer loans, where a consumer obtains a product or service immediately at the time of purchase and makes installment payments on purchase over time.
  • Currently, and unlike other consumer credit industries such as credit cards and mortgages, there is no federal regulation directly governing the BNPL industry, and the CFPB is considering steps to regulate this new industry.

Growth of Buy Now Pay Later

In recent years, consumers have diverted a significant portion of their debt-related spending from traditional credit cards to buy now, pay later (“BPL”) loan products. With a traditional credit card purchase, a consumer swipes their credit card, their credit provider pays the retailer in full for the purchase, and the consumer repays the credit provider over time, with interest if the refund is untimely. BNPL, which serves as a substitute for a traditional credit card, often takes the form of interest-free credit that allows a consumer to fully purchase the product using credit from the BNPL provider and then repay the BNPL loan provider over a short series of installments Payments. In fact, BNPL is a reinvention of layaway, but where the consumer gets the purchased product or service immediately, rather than after all payments have been made.

BNPL offers consumers the ability to obtain a product at the time of purchase and pay the balance over time, often without interest and often without the burden of a credit check, the threat of reporting late payments to credit bureaus or other channels that a credit card purchase may attach. Additionally, and although many BNPL loan providers charge an average late fee of $7 per missed payment on an average purchase price of $135, some BNPL providers do not charge any late fees. These benefits, combined with the simple and straightforward repayment model, have attracted many debt-conscious consumers to flock to BNPL.

This attraction has led to immense growth in the BNPL industry in recent years. Between 2019 and 2021, the annual loan volume of BNPL purchases increased from $2 billion to $24.2 billion, and the number of loans granted by BNPL increased by 970%, from 16.8 million to 180 million per year over the same period. Consumer Financial Protection Bureau: Buy Now, Pay Later: Market Trends and Consumer Impacts, p. 3-4 (September 2022), available here. The industry has also expanded beyond its original focus in apparel and beauty, as consumers now use BNPL products to pay for items such as pet care, gasoline, groceries and travel. Currently, BNPL’s top five lenders in the US are Affirm, Afterpay, Klarna, PayPal and Zip (formerly Quadpay in the US). According to the Consumer Financial Protection Bureau (“CFPB”), the federal agency responsible for providing consumer protection in the financial sector, other key data points on the BNPL sector include:

  • Loan approval rates increased to 73% in 2021 from 69% in 2020;
  • Late fees are also increasing, from 7.8% in 2020 to 10.5% in 2021;
  • Consumers returned 13.7% of at least some of the products purchased through BNPL in 2021, compared to 12.2% in 2020; and
  • Lender profit margins are shrinking, as margins in 2021 were 1.01% of the total amount of loans granted, compared to 1.27% in 2020.

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BNPL Risks and CFBP Interest and Monitoring

Although BNPL may appear to be a zero-risk credit option for consumers, the CFPB has identified several growing concerns in this burgeoning lending industry. First, and unlike traditional credit products, consumers who opt for an BNPL loan may not benefit from the same protections and disclosures as those who use a traditional credit card or mortgage. Namely, the CFPB identified “a lack of standardized cost of credit disclosures, minimal rights to dispute resolution, forced opt-in for automatic payment, and companies that assess multiple late fees on the same missed payment.” as the potential pitfalls of a BNPL loan. Second, BNPL presents data collection risks that can threaten consumers’ privacy and purchasing autonomy. Specifically, as many BNPL loan providers shift to financing consumer purchases through digital applications, they are gaining the ability to collect and organize consumer data and sell that data to other users or to create personalized profiles on consumer behavior and habits. Third, and because the BNPL model enables and encourages consumers to make more and more purchases without requiring lenders to come to a central credit bureau (as is the case with credit cards), consumers run the risk of overspending and leaving the BNPL lender without recourse in the event of default.

To analyze and assess these and other risks associated with BNPL, the CFPB conducted a market surveillance survey in December 2021 and a request for comment in January 2022.

CFPB and state regulatory efforts

In light of the risks associated with the BNPL model, BNPL lenders are currently subject to certain federal and state regulations. The CFPB, for example, has general enforcement power over BNPL lenders because they fall under the jurisdiction of a credit grantor. States also impose regulations, but regulations and enforcement mechanisms differ significantly from state to state. Indeed, while some states subject BNPL lenders to the same regulation and oversight as other consumer credit providers, other states are much more lenient and only require licensing or registration when the BNPL lender charges interest or finance charges on the purchase. Nevertheless, there are currently no uniform state or federal guidelines for BNPL industry participants.

In order to address BNPL’s risks, particularly those described above regarding disclosure of loan terms, data collection, and the accumulation of consumer debt, the CFPB is seeking to strengthen the regulation of BNPL. These regulations are likely to be very similar to those that apply to disclosure and reporting requirements currently imposed on the credit card industry. This may include the imposition of loan amount and/or number limits, centralized loan reporting requirements, standardized loan term disclosure forms, limitations on data collection and sale, among other restrictions. and regulations at the federal level.

Commentary from CFPB Director Rohit Chopra, as recent as September 15, 2022, confirms this potential path forward. Mr. Chopra said that “if lenders who buy now and pay later integrate the protections and protocols that we see in other financial products, it would go a long way to ensuring healthy competition where consumers benefit from a level of basic coverage. Of course, this path has been met with both praise and criticism, as some believe these protections are long overdue, while others argue that consumers should be able to make their own purchasing decisions without government oversight.

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