The speed at which the buy now/pay later loan industry is evolving could prompt the Consumer Financial Protection Bureau to action once the deadline for receiving consumer comments ends March 25.
The CFPB has not indicated when it might make its next move, but the co-author of a sweeping new BNPL industry report from the consumer advocacy organization U.S. PIRG suggests some regulatory guidance for the BNPL sector could come soon as a response to reports of escalating risk to consumers.
The CFPB began its inquiry in December 2021, and BNPL lenders were required to provide answers to a series of questions about their business practices by March 1.
“The CFPB has signaled it could move quickly on BNPL,” said Ed Mierzwinski, senior director of the Federal Consumer Program at U.S. PIRG and co-author of the report.
CFPB Director Rohit Chopra last week said in an appearance on CNBC that because the BNPL industry has generated huge growth recently his agency is exploring leading companies "to see [if] there are any regulatory gaps." Chopra added that the CFPB plans to "issue a set of reports to say what we might do and where we can make sure [BNPL] is safe for consumers and families."
CB Insights forecasts that the global BNPL industry could surpass $1 trillion in annual volume by 2025, as many consumers adopt new instant-financing options at the point of sale, moving away from traditional loans and credit cards that are more heavily regulated and subject to formal underwriting processes.
BNPL loans are covered under the Dodd-Frank Act’s protections for deceptive and abusive lending practices enforced by the CFPB. The popular “Pay in 4” model of BNPL loans — repaid in four equal segments — are not covered by the Truth in Lending Act, which applies to loans repayable in more than four installments.
“There’s always uncertainty about how laws and regulations will apply to new products, but it’s obvious that the CFPB won't wait long to deal with BNPL loans, to make sure consumers understand these products and that they’re not being harmed,” said Andrew Bigart, a partner at Venable in Washington.
The unique structure of BNPL loans creates opportunities for borrowers to quickly get in over their heads, said Brian Frontino, a partner at Stroock & Stroock & Lavan in Miami.
“Because consumers can enter into multiple BNPL arrangements, there is not always a formal underwriting on a person’s ability to repay, and often times BNPL loans are not reported to consumer reporting agencies, there’s some invisibility to this industry,” Frontino said.
U.S. PIRG’s report analyzed specific consumer complaints surrounding BNPL loans that prompted the CFPB to launch an inquiry into the business practices of top BNPL fintechs including Affirm, Afterpay, Klarna, Zip and PayPal.
Each of the BNPL firms involved with the investigation have said they are cooperating fully with regulators.
Total complaints filed to the CFPB and the Better Business Bureau about BNPL loans are still relatively low compared with other financial services products, but reports of problems with BNPL products increased sharply in the past two years, according to U.S. PIRG.
The top problems are incorrect information on credit reports, attempts to collect debt not owed and problems making payments on BNPL loans, the Washington-based nonprofit found in its research. Consumers also complained about unexpected late fees and charges for merchandise that was returned or never delivered.
Many BNPL firms don’t charge interest on BNPL loans, but late fees are common if you miss a payment, U.S. PIRG said. Other risks include overdrafts for consumers who signed up for automatic repayment through a debit card or bank account.
In its analysis of the CFPB’s searchable public complaint database, U.S. PIRG found that out of 616 complaints the CFPB logged through November 2021, 430 were linked to Affirm, 131 involved Klarna, three dozen focused on Zip (formerly QuadPay), 16 were about Sezzle and there were seven complaints about Afterpay (now owned by Block).
U.S. PIRG excluded complaints about PayPal, because its diversified business model includes many credit lines not tied to BNPL plans. U.S. PIRG analyzed complaints consumers filed with the CFPB between January 2019 and January 2022; data was collected last month.
The consumer advocacy organization also looked at consumers’ BNPL-related complaints to the Better Business Bureau’s website, including companies’ responses. In some cases, BNPL firms referred consumers making complaints back to the merchant, denying customers the opportunity to challenge errors and disputes in the way credit card issuers are required to do, U.S. PIRG said in its report.
Buy now/pay later loans also tend to exploit younger people who are less likely to understand the financial consequences of rampant BNPL borrowing, U.S. PIRG said.
U.S. PIRG concluded that consumers using BNPL loans need the same protection of other loans and credit cards under the Electronic Funds Transfer Act, the Truth in Lending Act and the Fair Credit Billing Act.
California regulators have already required some BNPL operators to become licensed California lenders subject to rate and fee caps, and are required to respond to consumer complaints, according to Mierzwinski.
“The CFPB could pressure some firms with enforcement actions, like California regulators have done with some BNPL firms, and he could hold the BNPL industry to existing regulations rather than creating new rulemaking, which can be a multiyear process,” Mierzwinski said.
Some problems the CFPB flagged in its ongoing inquiry may soon be resolved by market forces.
Competition from the traditional financial services sector also is pushing the BNPL industry to be more transparent, according to Mierzwinski.
Major BNPL providers including Affirm and Klarna are already seeing downward pressure on the fees merchants pay to them, as bank-based point-of-sale loans proliferate, such as Visa Installments and Mastercard Installments.
“I expect to see the BNPL lenders’ business models will adapt as banks and credit card companies crowd into the space as merchants are demanding lower interchange fees,” Mierzwinski said.
