CFPB vows to rein in buy now/pay later lenders

After spending months examining the business practices of buy now/pay later fintechs, the Consumer Financial Protection Bureau has produced an 82-page report that will help develop "interpretive guidance or rules" to cover gaps and consumer risks in the booming BNPL niche.

The CFPB's market-monitoring exercise began early this year when it surveyed five top BNPL providers — PayPal, Affirm, Afterpay, Klarna and Zip — and studied the overall ecosystem. The agency focused specifically on the "Pay in 4" style of loans that are spread over four equal segments, bypassing traditional lending regulations.

The CFPB's work will ensure that BNPL lenders' practices are brought into alignment with the Credit Card Accountability and Responsibility Act of 2009, known as the Card Act, Director Rohit Chopra told reporters in a Thursday conference.

The report will also serve as a road map for developing new BNPL industry requirements, Chopra said.

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The CFPB's move comes as the BNPL industry is undergoing some market retraction, even as the point-of-sale loans continue to grow in popularity.

A key finding in the CFPB's report is that BNPL lenders lack visibility into consumers' overall debt exposure from this category of installment loans. BNPL loan use increased about tenfold in the two years after the pandemic triggered an e-commerce boom, Chopra said.

"Existing approaches to measure outstanding credit card debt exclude BNPL loans, and it's critical that this category does not hide in the shadows," he said, noting that the lack of any formal credit reporting on BNPL loans also creates potential risk for mortgage lenders and auto lenders.

The BNPL firms themselves also don't know how many other loans a consumer may have with other BNPL providers, Chopra said.

The CFPB's report flagged possible overextension risk to consumers, including "loan stacking" where a borrower takes on multiple BNPL loans at the same time. Another area of concern is "sustained usage," where repetitive borrowing stresses the consumer's ability to meet other non-BNPL financial obligations.

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The agency's report also uncovered troubling examples of BNPL lenders using "data surveillance" to target consumers and accelerate marketing efforts, which Chopra said may need to be curtailed. The agency last month foreshadowed its concerns about how BNPL players and other technology companies are leveraging consumer data.

"Many of these firms have created their own gateways and digital app-driven marketplaces powered by personalized behavioral data to lure their users into buying more products financed through a BNPL loan," Chopra said.

The CFPB's planned deep dive into BNPL firms' use of consumer data dovetails with the agency's recent inquiry into Big Tech and related payment systems, and will be coordinated with the Federal Trade Commission's recent rulemaking processes for financial services companies' use of consumer data, Chopra said.

"Specifically, we'll be examining some of the types of demographic transactional and behavioral data that is collected for uses outside the lending transaction, including for the purpose of sponsored ad placement, sharing with merchants and developing user-specific discounting practices," Chopra said.

The CFPB will also examine whether BNPL lenders need better risk controls, noting that the chargeoff rate for BNPL loans nearly doubled to 3.8% last year from 2.9% in 2020. Public filings indicate the upward trend has continued through the first half of this year.

BNPL lenders also aren't adhering to industry standards on disclosing terms and conditions to consumers, according to Chopra.

"Many BNPL lenders are not offering the same set of clear dispute protections that credit card issuers have long been required to offer, which is creating some chaos for consumers when they return their merchandise or encounter other difficulties," he said.

Chopra said he's asked the CFPB staff to identify potential interpretive guidance or rules to issue with the goal of ensuring that BNPL firms abide by many of the baseline protections that Congress has already established for credit cards. He didn't provide a timeline for any proposed guidance or rules, but observers predict it could take up to a year.