CFPB study outlines “buy now, pay later” rules needed

Consumer Financial Protection Bureau (CFPB) The credit card companies are gearing up to provide the same type of tight security “Buy Now, Pay Later” (BNPL) Following the release of a recent study on industry, practice. Officials said their findings showed an exploding industry that not only was some consumer railroading and helped normalize debt, but data harvesting and monetization efforts had also begun with little oversight.

CFPB director Rohit Chopra said last Thursday, “Buy now, pay later is a fast-growing loan that acts as a close substitute for credit cards.” “We will work to ensure that borrowers have the same security, whether they use a credit card or buy now, pay off the loan later.”

key takeaways

  • Buy Now, Pay Later is an interest free payment option that primarily helps in paying for goods and services online.
  • Options grew substantially during the pandemic, with Affirm, Afterpay, Klarna, PayPal and Zip accounting for 180 million Buy Now, pay later loans originating more than $24 billion last year.
  • Buy Now, a study in the pay letter industry showed that consumer protections are lax and lenders often use data harvesting to build a database of valuable personal information.
  • The Consumer Financial Protection Bureau is establishing rules and guidelines to protect consumers from potential threats such as large-scale data collection.

Buy now, pay later is a booming industry

With so much focus on online retail in recent years, some companies and lenders have started rolling out their BNPL products. Whether called “pay-in-four,” “split pay,” or BNPL, the concept is the same – these were interest-free. point of sale installment loan Which lets consumers pay for purchases over time. In most cases, a down payment is required, usually with plans of around $1,000. Any late or missing payment will result in additional charges.

According to the CFPB report, BNPL grew so rapidly in popularity that the top five lenders, Affirm, Afterpay, Klarna, PayPal and Zip, were responsible for 180 million loan originations totaling $24.2 billion in 2021. Those figures dwarf 2019 figures, which saw the same lenders originating 16.8 million loans valued at $2 billion in 2019.

Consumers face some risk with Buy Now, Pay Later

While the lack of interest payments and staggered repayment plans may be attractive to most consumers, CFPB researchers found that BNPL loans were associated with some potentially harmful risks.

  • Lack of standardized consumer protection. Chief among the CFPB’s concerns is the apparent lack of frequent oversight and consumer protection. Because lenders are operating outside the confines of credit card regulation, some consumers consider themselves “things like a lack of standardized cost-of-credit disclosure, minimal dispute resolution rights, a forced opt-in for autopay, and appraisal companies.” Multiple late fees on a single missed payment.”
  • Little access to credit. The researchers found that among users of the top five lenders, the average borrower seeking to use BNPL was on the younger side. According to the data, young Millennials (25-33 years old) were the largest group, with older Millennials (34-40 years old) and Gen Z (18-24 year olds) in second and third place.
  • Normalizes debt. By getting young people into debt early, it runs the risk of normalizing credit accruals without proper management. The ease of availing BNPL loans is highlighted by the fact that the loan approval rating increased from 69% in 2020 to 73% in 2021 and the prevalence of late fees increased from 7.8% to 10.5% in the same time period.
  • Lenders have started making transfers to collect and sell user data. Even as BNPL schemes have grown in popularity, the researchers found that profit margins have started declining, increasing from 1.27% in 2020 to 1.01% of the total principal loan amount. With returns on the decline, the CFPB said they learned that some lenders were creating a “valuable digital profile of each user’s shopping preferences and behavior” by shifting toward proprietary apps.

How is the CFPB Responding?

Even though BNPL providers are subject to certain state and federal oversight, the CFPB is exercising its power over credit providers and “under certain circumstances any non-depository covered individuals, such as Buy Now, Pay Later.” The provider has the right to supervise.”

To that end, the CFPB said it would begin to identify areas that would provide guidance to BNPL lenders to ensure “adherence to many of the baseline protections that Congress has already established for credit cards.” and may establish rules and shall be subject to regular inspection. When it comes to borrowers’ BNPL loans at risk of withdrawing too much, the bureau will look at how lenders can start adhering to accurate credit reporting practices. For the issue of data harvesting, the CFPB will explore and call out data collection practices that lenders should avoid.

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