On December 16, 2021, the Consumer Financial Protection Bureau (Bureau, or CFPB) announced a “market monitoring” inquiry into “buy now, pay later” (BNPL) credit offered by five companies. In this alert, we explain the CFPB’s action and why it matters.
What Happened
Buy now, pay later (BNPL) is a form of deferred payment option in which the consumer is typically able to purchase a product in installment payments at a low interest rate, often zero, with the merchant subsidizing the financing through interchange. BNPL is typically extended by third-party providers rather than by the seller itself, making it a loan rather than a credit sale. Most BNPL plans do not charge interest but may include late charges and other fees. Also, 0% APR BNPL plans often are structured with four or fewer installments, and therefore disclosures under the Truth in Lending Act (TILA) are not triggered. BNPL credit is extended based on instant underwriting at the point of sale, and it often allows consumers with limited credit histories to purchase products they might otherwise be unable to acquire.
The Dodd-Frank Act, at Section 1022(c), requires the CFPB to monitor consumer financial markets and enables the agency to require market players to submit information to inform this monitoring. The CFPB is required to publish at least one report of its aggregated findings on insights learned from this inquiry. Today’s Orders to File Information seek to illuminate the range of these consumer credit products and their underlying business practices. In announcing the inquiry, the Bureau expressed concern about the lack of TILA and other disclosures relative to those of credit cards. The announcement also indicates concern with late fees, as well as charges imposed by a consumer’s bank. In addition, the CFPB is concerned with the explosive popularity of BNPL, resulting in equally explosive growth in debt, especially for younger consumers.
The BNPL product has seen growth internationally, and many other countries are also taking a close examination of its providers. As part of today’s inquiry, the Bureau is working with its international partners in Australia, Sweden, Germany and the U.K., specifically the Financial Conduct Authority. The Bureau will also be coordinating with the rest of the Federal Reserve System, as well as its state partners.
Why It Matters
Is the CFPB targeting one of the most user-friendly innovations in the marketplace? BNPL programs have made it possible for literally millions of consumers to purchase products they otherwise could not afford, on favorable financial terms. In serving these orders, the Bureau has publicly expressed concerns about consumers accumulating more debt than they ultimately can afford. In particular, the CFPB suggests that a consumer may be making multiple purchases on multiple schedules with multiple companies and may ultimately incur additional charges if unable to make all the payments, and thus pay more than anticipated.
The Bureau also expressed concerns about what it describes as “regulatory arbitrage.” According to the Bureau, some BNPL companies may be inadequately evaluating which consumer protection laws apply, whether certain disclosures are required, and whether or not certain protections that apply to credit cards apply to BNPL products, and what fees may be charged. For example, the Bureau noted that BNPL products may not provide dispute resolution protections required for products like credit cards.
Finally, the Bureau noted concerns about data harvesting by BNPL lenders. The CFPB claims that some companies have used this collected data to create closed-loop shopping apps with partner merchants, pushing specific brands and products, often geared toward younger audiences. The Bureau indicates it seeks to better understand how this data harvesting is used to engage in behavioral targeting and data monetization.
The Bureau’s inquiry appears to represent a significant departure from its earlier commentary about BNPL, possibly signaling an intent to regulate the product directly or through enforcement. While the issuance of these orders is strictly speaking “market monitoring” activity, the Bureau can use the information for any purpose. So this data collection could be used in the development of UDAAP enforcement road maps. Regulators abhor a regulatory vacuum, and the rapid growth of BNPL, especially in light of the limited disclosures in connection with some of these plans, has clearly drawn the CFPB’s attention.
If you have any questions about the orders and how they may impact your company, please reach out to one of the coauthors or any member of the Manatt Financial Services team.