On December 16, the CFPB announced that it had issued orders to five companies providing “Buy Now Pay Later” (BNPL) products to “collect information on the risks and benefits of these fast-growing loans.” Earlier this year, the CFPB released a blog directed at consumers explaining how BNPL products operate and identifying potential risks associated with the product. Notwithstanding the earlier blog, the December 16 announcement likely signals the start of the CFPB’s focus on regulating BNPL products through rulemaking, enforcement actions, or a combination of both.
The BNPL model allows consumers to make purchases and then divide the payment into several smaller installments (usually four). The installment payments are typically interest free, although some BNPL arrangements impose late fees for missed payments.
According to CFPB Director Rohit Chopra, the CFPB ordered the BNPL companies “to submit information so that [the CFPB] can report to the public about industry practices and risks.” Further, Director Chopra described the business model as a “new version of the old layaway plan,” with “faster twists where the consumer gets the product immediately but gets the debt immediately too.”
As described in the December 16 announcement, the CFPB seeks to target three areas of interest: accumulation of debt, regulatory arbitrage, and data harvesting. In particular, the CFPB indicated it is concerned that ease of use of BNPL products may result in consumers “quickly becom[ing] regular users of BNPL for everyday discretionary buying,” and that consumers are not receiving the same disclosures and protections provided under other products (e.g., credit cards). Additionally, an example of the order sent to the five companies reveals a much deeper dive into the companies’ respective BNPL products, with the order seeking six categories of information: Business Model/Metrics; Loan Performance Metrics; Consumer Protections; User Contacts and Demographics; Data Harvesting; and Data Monetization. The five BNPL companies must respond to the order by March 1, 2022.
The CFPB is establishing a pattern of issuing comprehensive industry-wide information requests under one of the agency’s lesser-known authorities — the CFPB’s “market monitoring” authority under Section 1022(c)(4)(B)(ii) of the Dodd Frank Act. In October, the CFPB issued similarly extensive inquiries to large technology companies that operate payment systems. Through market monitoring orders, the CFPB can compel production of vast amounts of information about a company’s business practices without any indication of law-breaking and without formally opening an enforcement matter. On the other hand, enforcement CIDs, while often quite broad themselves, are subject to certain CFPB rules and procedural safeguards that the CFPB has not explicitly incorporated for market monitoring orders. Courts have not yet opined on the contours of the CFPB’s market monitoring authority, and therefore some as-yet-defined limitations may emerge. But for now, this authority has become an important and powerful tool in Director Chopra’s toolkit.
It is worth noting that the CFPB action is part of a trend in Washington of increased scrutiny of the fast-growing BNPL sector. The Task Force on Financial Technology within the U.S. House Committee on Financial Services held a November 2, 2021, hearing on the risks and benefits of BNPL. And just a week prior to the CFPB’s BNPL orders, several Democratic senators, including Banking Committee Chairman Sherrod Brown, sent a letter to Director Chopra asking the Bureau to increase its oversight of the BNPL industry.
The BNPL market has exponentially grown in the past couple of years, and the CFPB has taken notice. Utilizing its less-known market monitoring authority (for the second time in recent months), the CFPB is seeking comprehensive information about this industry to inform future regulatory and enforcement decisions.