On December 16, the CFPB issued a series of orders to five companies offering "buy now, pay later" (BNPL) credit. The orders seek to collect information on the risks and benefits of these "fast-growing" products over concerns about "accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology." BNPL is a deferred payment option that allows consumers to split a purchase into smaller installments, typically four or less, often with a down payment of 25 percent due at checkout. To underscore BNPL's current popularity, a report issued by the California Department of Financial Protection and Innovation recently reported that "[t]he top six buy now pay later lenders accounted for 10,924,547, or 91 percent, of the total consumer loans originated in 2020" (we discussed this report in an earlier Consumer Finance & FinTech Blog post here).
The CFPB issued the orders pursuant to Section 1022(c)(4) of the Consumer Financial Protection Act (12 U.S.C. § 5512(c)(4)), which authorizes it to "monitor consumer financial markets and enables the agency to require market players to submit information to inform this monitoring." The CFPB provided an example of the order issued to these companies, containing 20 requests seeking information and data on several topics, including:
- Business Model/Metrics
- Loan Performance Metrics
- Consumer Protections
- User Contacts and Demographics
- Data Harvesting
- Data Monetization
The CFPB anticipates publishing the aggregated findings learned from this inquiry, and through the order, seeks to illuminate the range of these consumer credit products and their underlying business practices. The Bureau also noted that as part of the inquiry, it is collaborating with Australia, Sweden, Germany, and the UK, specifically, the Financial Conduct Authority. The CFPB will also be coordinating with the rest of the Federal Reserve System, as well as its state partners.
In conjunction with the orders and press release, the CFPB also posted a blog directed to consumers on what it believes to be common risks of using BNPL, including that BNPL products often carry fees, the complicated process of returning merchandise bought with BNPL, the fewer consumer protections offered when compared to credit cards, and that impact on credit scores. This follows a similar blog that was posted by the CFPB this past summer (we discussed this previous post in an earlier Consumer Finance & FinTech Blog post here).
Putting It Into Practice: While this is the first concrete government action aimed at BNPL participants, it should come as no surprise given the "massive growth in BNPL" and heightened inquiries from Congress. The CFPB's announcement comes after a House Financial Services hearing concerning BNPL, held on November 2, 2021, and one day after six Democratic U.S. senators on the Committee on Banking, Housing, and Urban Affairs, including Elizabeth Warren, urged the CFPB in a letter to examine BNPL products. Participants in the BNPL space would be wise to review these latest pronouncements from the CFPB to ensure that their processes align with the agency's consumer protection goals. Likewise, we should expect this inquiry to be a gateway to enforcement and supervision in the BNPL market.
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