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

Sept. 16, 2022, 9:00 AM

The Consumer Financial Protection Bureau will have to use a variety of tools to oversee buy now, pay later products because federal consumer protection laws will not always apply to the fast-growing financing sector.

CFPB Director Rohit Chopra said Thursday that he wants to bring credit-card style protections for the sector, including improving disclosures, fraud and dispute resolution protections and other issues in buy now, pay later (BNPL) products. These are typically short-term installment loans paid back over four payments every two weeks.

Some traditional consumer protection laws—like the Truth in Lending Act and the Credit CARD Act—don’t cover BNPL products. The bureau will have to take more indirect paths, like issuing advisory opinions about how existing laws apply to BNPL or enforcement actions to bring claims 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 of the mainstream BNPL products,” said Jonathan Pompan, the chair of Venable LLP’s consumer financial services group.

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

Some of these companies had insufficient disclosures of loan terms, the report said. The CFPB also cited a lack of uniform dispute resolution processes, fraud protections and concerns over the use of customer data as risks in the products.

Credit card companies have to comply with existing laws for many of those issues. The problem for the CFPB is that the way those statutes are written may limit the CFPB’s ability to extend those protections to BNPL.

Other Paths

The CFPB said it plans to look into new regulations and crafting advisory opinions to push BNPL providers to update their operations.

Advisory opinions are similar to guidance, but they carry more implied force. The CFPB has been using them under Chopra to push for changes in a host of industries without going through the full notice-and-comment rulemaking process.

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

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

Easy Pickings

Some BNPL practices cited in its report fall under statutory authority the CFPB has.

One example is some BNPL firms’ requirement that consumers sign up for autopay that is activated when an installment comes due. The CFPB could tackle that issue using its powers under the Electronic Fund Transfer Act.

The CFPB also has the power to designate big companies in any market for supervision. Under the CFPB’s supervision process—which banks with over $10 billion in assets and other large companies in debt collection, payday lending and other markets undergo—the agency’s examiners can review all books and records at a consumer finance company to spot problems.

The CFPB said it wants to start supervising the biggest BNPL firms, and invited them to volunteer. If they don’t, the CFPB can either create a larger participant rule identifying which firms are subject to supervision or can determine that a consumer finance firm is “risky” and subject it to temporary supervision.

‘Here to Stay’

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

There were fears among industry participants that the CFPB would find a host of consumer protection problems within buy now, pay later. But the bureau instead found the industry “imposes significantly lower direct financial costs on consumers than legacy credit products.”

The agency also found that companies’ underwriting tools might 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, the director of policy research at BTIG.

Industry Maturation

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

Some companies, like Affirm, already provide disclosures mandated by 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, like longer-term installment loans, that are subject to various consumer finance laws. So ramping up protections on BNPL loans may not be that difficult, said Ariana-Michele Moore, an advisor at the Aite-Novarica Group.

“I don’t think it’s going to impact them all that much. A lot of them are already doing it,” she said.

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

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editors responsible for this story: Keith Perine at kperine@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com