The following is a guest post by Lauren Sartwell and Dat Tran, Klaros Group.
Many consumers think of Buy-Now-Pay-Later (BNPL) as a new product, but the concept has been around for over 150 years, starting as “installment plans” and “layaway” programs.
BNPL shot to prominence during the Coronavirus pandemic, capturing the attention of consumers, media, and regulators, and is expected to increase significantly with holiday shopping.
Praised for its convenience, BNPL purports to revolutionize shopping and credit. Whatever the truth of that claim, it may also drive many Americans, especially younger generations, into debt, under terms and conditions they don’t always understand.
With U.S. regulators poised to respond, BNPL providers face a critical choice between waiting for the FTC or CFPB to lower the boom and taking proactive measures now to reduce their regulatory risk profile.
Enter the CFPB
Fully a year ago, in December 2021, the CFPB sent marketing monitoring orders requesting information and data to five large BNPL providers.
In January 2022, the agency followed up with a request for comment from interested parties. That request generated responses from consumer advocacy groups, policy think tanks, and even state Attorneys General, all urging the CFPB to act to regulate the BNPL industry.
And in September, the CFPB issued its summary report: Buy Now, Pay Later: Market trends and consumer impacts (BNPL report), declaring “[a]s part of this review, the agency will also ensure Buy Now, Pay Later lenders, just like credit card companies, are subjected to appropriate supervisory examinations.”
The CFPB’s report identified three areas of potential consumer risk arising from BNPL: discrete consumer harms (e.g., lack of standard disclosures, dispute protections, mandatory use of autopay, and late fees), data harvesting, and consumer overextension. CFPB regulation by enforcement or interpretation is coming soon.
Although existing lending laws and regulations do not expressly contemplate BNPL, the CFPB should not have to stretch much to bring BNPL within the scope of its regulatory and enforcement jurisdiction.
In the press release accompanying the publication of the September 2022 report, CFPB Director Rohit Chopra hinted at the Bureau’s approach, stating that BNPL “is a type of loan that serves as a close substitute for credit cards” and that the Bureau will ensure that similar protections are extended to BNPL products.
The agency could rely on broad, more general legal authorities, such as Unfair, Deceptive, and Abusive Acts or Practices (UDAAP), or use its interpretive authority to make BNPL “fit” into an existing regulatory framework, such as the Truth-In-Lending Act (Regulation Z).
Areas ripe for regulation
Whether the CFPB uses its UDAAP authority to bring an enforcement action against an existing BNPL provider, issues an interpretation, or initiates formal rulemaking to wade into BNPL regulation, the September 2022 report gives some clues about where the Bureau will focus:
The current BNPL landscape lacks required consumer disclosures and standardized disclosure formats. Standardized disclosures are a long-standing regulatory tool for improving consumer transparency and enabling comparison shopping.
The CFPB’s BNPL report suggests that disclosures such as those required for open-end credit under Regulation Z may also benefit BNPL customers.
Such disclosures would help to clarify the terms of a BNPL transaction and include items such as the number, timing, and amount of payments, as well as any fees that could be charged, such as late fees, that could increase the cost of a transaction to consumers.
The Bureau could use its UDAAP authority to enforce clear and conspicuous disclosures, reasoning that failing to provide consumers with appropriate transparency into key terms constitutes a deceptive practice likely to mislead the consumer.
Ability to repay
BNPL lenders do not routinely report consumer repayment behaviors to consumer reporting agencies.
Consequently, other lenders contemplating new extensions of credit may lack information essential to sound underwriting, and consumers can become overextended. Overextension can also occur as consumers depend on BNPL for day-to-day expenses like food and gas, eventually leading to default.
The CFPB could respond to this risk by requiring BNPL lenders to establish a consumer’s ability to repay before each extension of credit. BNPL lenders would likely need to implement standardized consumer reporting to meet such a requirement.
BNPL lenders typically require future installment payments to be made automatically from the debit or credit card used at checkout.
But the Electronic Funds Transfer Act, as implemented by Regulation E, prohibits lenders from requiring consumers to agree to automatic payments.
Moreover, consumers who make automatic BNPL payments by credit card and who do not pay their credit card balances in full each month will incur interest obligations to their card issuer – arguably making the “no interest” claims of many BNPL lenders deceptive. Indeed, some credit card issuers have started prohibiting the use of their cards for payment of BNPL installments.
The CFPB could address these concerns by prohibiting BNPL payments by credit card or requiring BNPL lenders to accept payments by non-automatic means.
Users of credit cards and other open-end credit products covered by Regulation Z are protected by billing error and dispute resolution rights, including the right not to pay a debt involved in an active dispute.
According to the CFPB report, dispute resolution is the top BNPL complaint category in the CFPB’s consumer complaint database.
Given the volume of such complaints, the Bureau may require BNPL to comply with the billing error and dispute resolution provisions of Regulation Z, including notification and investigation requirements and preserving the consumer’s right to withhold payments for disputed amounts.
The blog included three critical compliance checks for BNPL companies: focusing on claims substantiation, consumer understanding, and stating BNPL providers’ responsibilities to consumers cannot be pushed to other companies and providers involved in the BNPL lifecycle. The FTC blog concludes with a warning to “avoid deceptive or unfair tactics” in dealing with consumers.
While we wait for regulatory clarity, it would behoove BNPL providers to consider the FTC’s suggestion to “conduct a compliance check,” including reviewing their policies, procedures, and products end-to-end to ensure fair treatment of consumers throughout the product lifecycle.
BNPL providers can also consider steps to improve transparency and consumer protection, like developing clear disclosures, enhancing complaints programs to include disputes and billing errors, considering what installment payment methods are appropriate, and ensuring they have adequate compliance resources to manage the more demanding regulatory environment ahead.
A thorough review of existing compliance processes now with an eye toward coming regulatory change will better position BNPL providers to adapt to a changing environment.
Lauren Sartwell joined Klaros from Intuit Inc. where she oversaw product compliance and consumer protection for several of Intuit's regulated financial services products. In her time at Intuit, Lauren worked closely with business partners and stakeholders to assess risks, define compliance requirements, and implement controls to launch new and innovative consumer and small business offerings, including several partner-based products. Before leaping to Fintech, Lauren built her career at community, regional, and large financial institutions in various compliance and internal audit roles. She established compliance audit functions, coordinated and responded to state and Federal examinations, and conducted second-line compliance testing.Lauren received her BAs in English and Political Science from Iowa State University and is a Certified Regulatory Compliance Manager.
Dat supports Klaros' operations and advisory portfolio by performing a mix of qualitative and quantitative economic and regulatory research, data analysis, and data visualization. Before joining Klaros Group, Dat was deeply involved in the customer complaint management program at Green Dot Corporation, where he regularly liaised with federal regulators and gained exposure to a wide range of compliance issues. Dat received his B.A. in History from California State University, Fullerton, and his M.A. in History from California State University, Northridge, where he graduated with honors.