Banking and Finance Law Daily Wrap Up, CONSUMER CREDIT—ICBA, state AGs comment on CFPB’s ‘buy now pay later’ inquiry, (Mar 29, 2022)

By Thomas G. Wolfe, J.D.

While the state attorneys general focus on the need for stronger consumer protections to guard against predatory lending by “BNPL” providers, the ICBA emphasizes transparency and consumer disclosures in a more “regulated ecosystem” by supervised entities.

In separate comment letters, the Independent Community Bankers of America (ICBA) and state attorneys general (AGs) for 21 states have weighed in on the Consumer Financial Protection Bureau’s inquiry into Buy-Now-Pay-Later (BNPL) providers and the BNPL marketplace. While the ICBA recognizes that “alternative products and services such as BNPL can assist consumers, especially un- and under-banked Americans,” the ICBA believes that “such products are best when offered in a regulated ecosystem and by supervised entities, such as community banks.” In addition, the community banking organization favors consumers receiving “transparent details” before they enter into a BNPL transaction. Meanwhile, in their joint letter, the state AGs communicate that although they support “access to safe and affordable credit,” they are concerned about “new and supposedly innovative financial products that promise to disrupt and democratize the industry but push consumers into cycles of debt and carry some of the same terms and features as other expensive and predatory financial products.” Accordingly, the AGs’ many recommendations to the CFPB find a common thread of establishing or bolstering consumer protections for BNPL products.

Generally, BNPL credit is a type of deferred payment option that generally allows consumers to split a purchase into smaller installments, often with a down payment due at checkout. Consumers usually must provide little information to a merchant, and there is often no interest. Merchants typically pay 3 to 6 percent of the purchase price to BNPL companies because consumers often purchase more and spend more when using BNPL credit, according to the CFPB. In December 2021, the CFPB ordered several companies offering BNPL credit to produce information about their business practices to address the Bureau’s concerns about accumulating debt, regulatory arbitrage, and data harvesting in the consumer credit market (see Banking and Finance Law Daily, Dec. 17, 2021). In January 2022, the CFPB expanded its inquiry into BNPL products and business practices, inviting anyone interested in the BNPL market to submit comments (see Banking and Finance Law Daily, Jan. 13, 2022).

ICBA’s letter. In its March 25, 2022, comment letter to the CFPB, the ICBA acknowledges that unbanked, under-banked, and “credit invisible” consumers can benefit from “a wide array of options and choices, such as BNPL.” At the same time, however, the ICBA cautions that “there is certain potential harm that can be associated with these products, especially when offered by non-bank, un-supervised entities that are not required to comply with federal consumer protection laws.”

Consequently, the ICBA “supports a framework that allows for innovation of novel financial products and services, but also one which is conducted and supervised in an ecosystem commensurate with laws and regulations that are in place to protect consumers and in which community banks currently operate.” Moreover, the ICBA believes that “consumers should receive transparent details before entering into a BNPL transaction, akin to disclosures required by the Truth in Lending Act … and be provided a pathway for building their credit profiles,” the organization stated.

State AGs’ letter. In their March 25, 2022, comment letter to the CFPB, the state AGs from California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington applauded the CFPB for its inquiry into BNPL providers. Expressing its hope that the Bureau’s inquiry is “the first step towards greater transparency and regulation of the industry,” the state AGs made several recommendations. Among other things, the state AGs urged the Bureau to:

• assess “whether and how BNPL providers ensure consumer rights and protections, disclosure of fees, charges, and other essential terms to consumers, as well as how they comply with general requirements to refrain from unfair, deceptive, and abusive acts and practices;”

• analyze “what steps, if any, BNPL providers take in considering ability-to-repay and the types and sources of information they rely on;”

• consider specific rulemaking to “clarify BNPL providers’ obligations to conduct ability-to-repay analyses;”

• review BNPL “policies and procedures for credit reporting and the information that BNPL providers furnish to credit bureaus;”

• monitor “the emerging role of credit bureaus in the BNPL marketplace:”

• study the “state of BNPL providers’ disclosures to consumers, and consider using its rulemaking authority to ensure, first, that BNPL providers are clearly and accurately disclosing all actual and potential fees and charges to consumers and, second, that any fees and charges are reasonable and proportional to the overall cost of the loan;”

• examine dispute resolution procedures and protections offered by BNPL providers, especially with an eye toward countering “unscrupulous merchants;”

• look into the policies, procedures, and practices of BNPL providers pertaining to debt collection “to ensure that providers comply with all applicable consumer protections;”

• inquire about BNPL provider “privacy policies” and “how BNPL providers collect, use, sell, and protect consumer data;” and

• monitor the partnerships “between BNPL providers and for-profit schools and online course providers” and “consider issuing guidance and rulemaking clarifying regulations for BNPL credit to finance education.”

Companies: Independent Community Bankers of America

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