CFPB Forced to Get Creative with Buy Now, Pay Later Protections

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The Consumer Financial Protection Bureau will need to use a variety of tools to oversee buy now, pay later products, as federal consumer protection laws won’t always apply to the growing finance industry.

CFPB director Rohit Chopra said on Thursday he wants to bring credit card-like protections to the industry, including improving disclosure, fraud and dispute resolution protections and other related issues. to buy now, pay later (BNPL) products. These are generally short-term installment loans repaid in four installments every two weeks.

Some traditional consumer protection laws, such as the Truth in Lending Act and the Credit CARD Act, do not cover BNPL products. The office will need to take more indirect routes, such as issuing advisory opinions on how existing laws apply to the BNPL or enforcement actions to bring complaints of unfair, deceptive or abusive practices (UDAAP).

“Many of the restrictions and requirements that are discussed in the report simply do not apply to many traditional BNPL products,” said Jonathan Pompan, president of Venable LLP’s consumer financial services group.

In a highly anticipated report on Thursday outlining its preliminary plans for monitoring the industry, the bureau focused on BNPL’s five largest suppliers: Affirm Holdings Inc.; Afterpay, now a unit of Block Inc.; Klarna; Paypal Holdings Inc.; and Zip.

Some of these companies had insufficient information on loan terms, according to the report. The CFPB also cited a lack of uniform dispute resolution processes, fraud protection, and concerns about the use of customer data as risks in products.

Credit card companies must comply with existing laws for many of these issues. The problem for the CFPB is that the way these bylaws are drafted may limit the CFPB’s ability to extend these protections to the BNPL.

Other paths

The CFPB said it plans to review new regulations and develop advisory opinions to push BNPL providers to update their operations.

Advisory opinions are similar to advice, but they have more implicit force. The CFPB used them under Chopra to push for changes in a multitude of industries without going through the full notice-and-comment rule-making process.

The CFPB can also use its UDAAP powers to regulate the industry, including through law enforcement.

“UDAAP applies to a lot of things, and I think part of the CFPB’s recent push is trying to extend the laws where you didn’t think they applied,” Allison said. Schoenthal, co-president of consumer banking and financial services at Goodwin Procter LLP. practice.

Easy Pickups

Certain BNPL practices cited in its report fall under the statutory authority of the CFPB.

An example is the requirement by some BNPL companies that consumers sign up for automatic payment which is activated when a payment is due. The CFPB could tackle this problem by using its powers under the Electronic Funds Transfer Act.

The CFPB also has the power to designate large companies in any market for oversight. As part of the CFPB oversight process – which banks with more than $10 billion in assets and other large debt collection, payday lending and other market businesses undergo – examiners from the agency can review all of a consumer finance company’s books and records for problems.

The CFPB has said it wants to start supervising the biggest BNPL firms and has invited them to volunteer. If they fail to do so, the CFPB can either create a broader participation rule identifying the companies subject to monitoring, or determine that a consumer finance company is “at risk” and subject it to temporary monitoring. .

‘Here to stay’

The buy now, pay later market has been growing rapidly since 2020, a rise that coincided with the coronavirus pandemic. Industry revenue grew by around 970% between 2019 and 2021, while lending volume jumped more than 1,000% during that time, the bureau said.

Industry players feared the CFPB would find a host of consumer protection issues in buy now, pay later. But the bureau instead found that the industry “imposes significantly lower direct financial costs on consumers than traditional credit products.”

The agency also found that companies’ underwriting tools could minimize overuse and other potential problems.

“While we can expect regulatory pressure around certain business practices, the release serves as a clear reaffirmation that the BNPL product is here to stay,” said Isaac Boltansky, director of policy research at BTIG.

Industry Maturation

The CFPB report lays out a regulatory roadmap for BNPL firms to follow.

Some companies, like Affirm, already provide mandatory information under the Truth in Lending Act and other protections cited by the CFPB as lacking in the broader industry.

Other companies that offer BNPL also issue more traditional credit products, such as longer-term installment loans, which are subject to various consumer credit laws. So beefing up protections on BNPL loans might not be that difficult, said Ariana-Michele Moore, an adviser at Aite-Novarica Group.

“I don’t think it’s going to affect them that much. Many of them are already doing that,” she said.

Even without pressure from the CFPB, many BNPL firms could see updating their consumer protection efforts as good for business as they compete with fintechs and traditional financial firms that offer such protections. said Christine Roberts, senior vice president of Citizens Bank who leads their Citizens Pay unit. , which offers a BNPL product.

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