Buy Now Pay Later and Regulation

Buy Now Pay Later, or BNPL, probably would never exist in its current form but for regulation. The Truth in Regulation Act does not apply to loans which are to be repaid in no more than four installments, and BNPL usually provides for repayment in exactly four installments. In other words, BNPL was created to fit within a TILA loophole (in this post, I omit discussion of other forms of BNPL).

But that doesn’t mean BNPL shouldn’t be regulated, and I hope Congress and the CFPB get around to regulating it soon. When they do, here are some things they should consider:

Disclosures. The industry often invents new products that are not covered by existing disclosure regulation and lawmakers eventually respond with new laws mandating disclosures for the new products. Examples include the Consumer Leasing Act, which regulates auto leasing disclosures, HOEPA, which regulates high-interest mortgages, and rent to own state laws. It is time for that to happen with BNPL. While regular readers of the blog may have noted that I am not a huge fan of disclosure, disclosures do serve a purpose for those who can read and understand them, especially when they are simple and brief. In Chi Chi Wu’s words, disclosure is a necessary but not sufficient consumer protection.

Underwriting. Increasingly, reports suggest that some consumers have assumed so much BNPL debt that they are getting into trouble. One study found that BNPL consumers “experience rapid increases in overdraft charges and credit card interest and fees, as compared to non-users.” Regulators should explore whether BNPL is a net benefit for those who use it and whether steps can be taken to ensure that it is not used harmfully.

Privacy protections. The CFPB report speaks to this.

Fee Regulation. TILA limits credit card late fees to reasonable and proportional amounts. If consumers optimistically take out BNPL loans anticipating that they will not pay late fees, BNPL lenders may charge excessive late fees on the theory that high late fees will not deter consumers from using BNPL. But some consumers, despite their optimism, end up paying those late fees.

Consumer Protections. TILA allows consumers to assert claims and defenses against credit card issuers when products are defective, have billing errors investigated, and protects consumers against unauthorized use of their credit cards. BNPL purchases should be similarly protected.

Credit Reporting. BNPL loans should be reported to credit bureaus so consumer credit scores can benefit from making timely payments. Some BNPL lenders already do this but reportedly not all do. When consumer BNPL obligations are handed over to debt collectors, the collectors may report the consumers’ defaults to credit bureaus, meaning that late BNPL payment can harm consumer credit scores even though timely payments may not be reported.

The industry has an incentive to create new products that are not yet regulated so it can avoid providing consumer protections and make more money at the expense of consumers. It is up to lawmakers to move swiftly to provide consumers the protections they need so that consumers are not unfairly exploited.

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