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September 16, 2022

By: Allen H. Denson, Kingsley Nwamah

On September 15, 2022, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited report regarding buy now, pay later (“BNPL”) products, accompanied by a press release and prepared remarks from Director Chopra outlining the CFPB’s next steps in the regulation of BNPL products.  In his prepared remarks, Director Chopra compared BNPL products to credit cards and made clear that the Bureau intends to proceed with rulemaking and guidance aimed at addressing three areas of potential consumer harm that the Bureau has identified:  (1) inconsistent consumer protections across various BNPL products; (2) data harvesting by BNPL lenders and the monetization of that data; and (3) potential debt overextension by consumers.

The Bureau’s report emphasized that consumers seeking BNPL credit may obtain products that do not offer standard credit disclosures, and BNPL providers may provide minimal dispute resolution rights or impose multiple late fee penalties for the same missed payment.  The Bureau also highlighted BNPL providers’ data harvesting and monetization, picking up on topics raised in the CFPB’s August 4, 2022 report regarding payment systems.  Specifically, the Bureau noted that BNPL lenders are shifting towards creating their own apps, which allow lenders to develop a digital profile of their customers with shopping preferences and data.  Just as it previously explained, BNPL providers could use the data collected to direct consumers to merchants and monetize those efforts by charging referral fees to merchants willing to pay for advertising space, demonstrating the Bureau’s concern over possible consolidation of market power in the hands of a few platforms that own the largest volume of consumer data.  The report finally highlighted the potential risk that consumers may be overextended and quickly accumulate significant debt if borrowers take out several loans within a short time frame at multiple lenders, which is possible since BNPL providers do not furnish data to credit bureaus.  The Bureau warned that these practices amounted to loan stacking and encourage sustained use of credit in an irresponsible way. 

As to its next steps, the Bureau made clear that it will identify potential rules to ensure that BNPL providers are adhering to the same protections that Congress has established for other forms of credit.  It will also identify data surveillance practices that BNPL lenders should avoid and appropriate credit reporting practices that the BNPL industry can employ.  Finally, the Bureau said that it expects to subject BNPL providers to its supervisory authority either on a voluntary basis or under its authority to designate companies for supervision through perceived risk to consumers. 

Ultimately, the report’s findings and projected next steps are consistent with the industry-wide expectation that the CFPB would move towards additional regulatory interventions regarding BNPL products.  A disclosure-based rule, which seems to be the Bureau’s immediate plan, will be welcomed by many in the industry.  Nonetheless, other findings in the report are potentially concerning and may provide a preview of future enforcement actions, in particular, the Bureau’s identified concerns with loan stacking and sustained use.  Those familiar with the Bureau’s regulation of payday lending will recognize that this is the same playbook the Bureau used in its initial efforts to reign in that industry.

September 16, 2022

By: Allen H. Denson, Kingsley Nwamah

On September 15, 2022, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited report regarding buy now, pay later (“BNPL”) products, accompanied by a press release and prepared remarks from Director Chopra outlining the CFPB’s next steps in the regulation of BNPL products.  In his prepared remarks, Director Chopra compared BNPL products to credit cards and made clear that the Bureau intends to proceed with rulemaking and guidance aimed at addressing three areas of potential consumer harm that the Bureau has identified:  (1) inconsistent consumer protections across various BNPL products; (2) data harvesting by BNPL lenders and the monetization of that data; and (3) potential debt overextension by consumers.

The Bureau’s report emphasized that consumers seeking BNPL credit may obtain products that do not offer standard credit disclosures, and BNPL providers may provide minimal dispute resolution rights or impose multiple late fee penalties for the same missed payment.  The Bureau also highlighted BNPL providers’ data harvesting and monetization, picking up on topics raised in the CFPB’s August 4, 2022 report regarding payment systems.  Specifically, the Bureau noted that BNPL lenders are shifting towards creating their own apps, which allow lenders to develop a digital profile of their customers with shopping preferences and data.  Just as it previously explained, BNPL providers could use the data collected to direct consumers to merchants and monetize those efforts by charging referral fees to merchants willing to pay for advertising space, demonstrating the Bureau’s concern over possible consolidation of market power in the hands of a few platforms that own the largest volume of consumer data.  The report finally highlighted the potential risk that consumers may be overextended and quickly accumulate significant debt if borrowers take out several loans within a short time frame at multiple lenders, which is possible since BNPL providers do not furnish data to credit bureaus.  The Bureau warned that these practices amounted to loan stacking and encourage sustained use of credit in an irresponsible way. 

As to its next steps, the Bureau made clear that it will identify potential rules to ensure that BNPL providers are adhering to the same protections that Congress has established for other forms of credit.  It will also identify data surveillance practices that BNPL lenders should avoid and appropriate credit reporting practices that the BNPL industry can employ.  Finally, the Bureau said that it expects to subject BNPL providers to its supervisory authority either on a voluntary basis or under its authority to designate companies for supervision through perceived risk to consumers. 

Ultimately, the report’s findings and projected next steps are consistent with the industry-wide expectation that the CFPB would move towards additional regulatory interventions regarding BNPL products.  A disclosure-based rule, which seems to be the Bureau’s immediate plan, will be welcomed by many in the industry.  Nonetheless, other findings in the report are potentially concerning and may provide a preview of future enforcement actions, in particular, the Bureau’s identified concerns with loan stacking and sustained use.  Those familiar with the Bureau’s regulation of payday lending will recognize that this is the same playbook the Bureau used in its initial efforts to reign in that industry.