The Consumer Financial Protect Bureau (CFPB) issued a release on September 15, 2022, announcing its intent to issue additional interpretive guidance or rules to ensure “Buy Now, Pay Later” (BNPL) lenders comply with the same or similar regulations already established for credit cards following a study on the industry.
In its press release, the CFPB Director Rohit Chopra noted the rapidly growing use of “Buy Now, Pay Later is a rapidly growing type of loan that serves as a close substitute for credit cards.” While credit cards include interest charges, BNPL loans do not, making them more attractive to consumers. Instead, these loans allow consumers to purchase a product and repay the purchase price through several installment payments. As a result, BNPL loans have become prominent over the past several years, particularly during the COVID-19 pandemic. These previously niche loans, typically used for apparel and beauty purchases, are now used in almost all consumer-facing industries.
The CFPB noted several highlights of BNPL loans found through the study, which include:
- Increased loan approval rates year over year;
- Increased occurrences of late fee charges;
- Increased product returns by consumers; and
- Shrinking profit margins by BNPL lenders.
As a result of the study, the CFPB outlined the following concerns with the BNPL industry, mainly because the marketing of these loans leads consumers to believe the loans are a “zero-risk credit option.”
- Limited Consumer Protections: While BNPL loans are used as an alternative to credit cards, they lack the standard credit disclosures, dispute resolution rights, etc., that similar consumer credit transactions often require.
- Data Harvesting: Lower profit margins associated with BNPL loans have pushed the industry to monetize consumer data, potentially impacting consumer privacy.
- Debt Accumulation: According to the CFPB, BNPL loans encourage consumers to purchase more products and borrow more, resulting in consumers becoming overleveraged. While the CFPB notes that the lenders in this space do not furnish credit data to credit reporting companies, the CFPB is concerned about this industry extending credit to consumers who may not be able to repay the debt.
The CFPB has yet again reinforced its commitment to regulate lenders that extend consumer credit. The CFPB’s decision to either enforce existing consumer laws (i.e., the Truth in Lending Act disclosures already required for credit cards and other consumer loans) or create new rules on the growing BNPL industry is not unexpected. However, the CFPB’s release shows a renewed focus on protecting consumers’ privacy rights and ensuring that consumers can afford to repay their credit lines before offers of credit are extended, and demonstrates once more that the Bureau will seek to regulate emerging forms of consumer credit.