Regulators are playing catch up with the burgeoning “buy now, pay later” business.
Welcomed by shoppers as an interest-free way to make purchases, from clothing to travel, the loans let borrowers pay over time, usually in four installments over six weeks.
Usage of the loans surged during the pandemic, helping to drive an online shopping boom, the CFPB noted.
“Regardless of whether a shopper swipes a credit card or uses buy now, pay later, they are entitled to important consumer protections under longstanding laws and regulations already on the books.”
Additionally, BNPL lenders will have to provide users with periodic billing statements akin to those issued for traditional credit card accounts, according to the interpretive rule, which becomes effective in 60 days, the agency said.
Under the new rules, BNPL lenders must now: Investigate disputes initiated by consumers, pausing payment requirements during the process.
The loans offered by companies including Affirm, Afterpay, Klarna, PayPal and Zip are not typically reported on consumers’ credit reports, nor are they reflected in consumer credit scores.
Apple bucked that trend in announcing in February that it would report loans made through its Apple Pay Later program to Experian, one of the credit bureaus.
The growing “buy now, pay later” industry is catching regulators off guard.
According to a Wednesday announcement from the Consumer Financial Protection Bureau, providers of the increasingly common point-of-sale loans are now required to provide some of the same protections as credit card users, such as the ability to challenge charges and request reimbursement for returned goods.
At a press briefing on Tuesday, CFPB officials stated that the agency, which guards against financial abuse, is acting in response to complaints from customers who claim they are treated unfairly by pay-later providers when they dispute charges or try to return merchandise.
Shoppers welcomed the interest-free option to finance everything from clothing to vacation, and the loans allowed borrowers to spread out payments over a period of time, typically six weeks in four installments. The CFPB reported that a surge in loan usage during the pandemic contributed to an explosion in online shopping.
Much like credit cards.
According to an agency interpretation rule, since BNPL lenders are essentially credit card issuers, they are required to offer their customers the standard protections associated with using plastic to make purchases.
“When buyers choose to pay later at the checkout, they don’t know if the lender will assist them if they don’t receive what was promised or if they will receive a refund if they return their merchandise,” CFPB Director Rohit Chopra stated in a statement. “A consumer is entitled to significant consumer protections under established laws and regulations, regardless of whether they use a credit card or a buy now, pay later option. ****.
The agency stated that the interpretive rule, which takes effect in 60 days, also requires BNPL lenders to give customers recurring billing statements that resemble those for regular credit card accounts.
The new regulations require BNPL lenders to do the following:.
Consumer disputes should be looked into, with payment requirements suspended while the investigation is ongoing.
Refund customers’ accounts for returned goods or canceled services.
Send customers recurring billing statements that resemble the ones they get for regular credit cards.
Consumer advocates have called for providers to confirm that borrowers can repay the loans, but the new CFPB rule won’t do so. Instead, it will subject BNPL lenders to stricter government oversight.
“In our opinion, the industry is largely spared from the most burdensome requirement—requiring borrowers to undergo an ability-to-repay test—by this interpretive rule. It’s a win on that front, according to a report by TD Cowen Washington Research Group analyst Jaret Seiberg.
Possibility of accruing debt.
In addition to using a credit card, buy now, pay later is becoming a more popular option. The five largest companies in the market generated $24 billion in loans in 2021, which is a more than 10-fold increase from $2 billion in 2019, according to the CFPB.
As per Bankrate, half of consumers between the ages of 25 and 44 utilize BNPL. According to Adobe Analytics, the option may result in spending of up to $84 billion, a 13% increase over the previous year.
Consumer Reports issued a warning about BNPL plans last year, stating that they may impose high late fees on customers.
Consumer credit reports and scores do not normally include information about loans provided by companies such as Affirm, Afterpay, Klarna, PayPal, and Zip. This has given rise to worries that consumers may be taking on excessive debt that is hidden from regulators or other lenders.
Apple broke with this trend in February when it declared it would provide Experian, one of the credit bureaus, with information about loans made through its Apple Pay Later program.
