Where will the CFPB be when buying a loan now / repaying later?


Buy now / pay later providers may have breathed a sigh of relief over the recent advice from the CPA, but analysts warn that the agency’s low-key response may only be a prelude to tighter regulation.

A CFPB blog post earlier this month did not criticize buy now / pay later, but encouraged consumers to evaluate their finances before using it. The agency also stated that using the BNPL does not improve credit ratings and in some cases could negatively impact a consumer’s credit history.

Some observers suggested that the CFPB’s soft statement was an attempt to show that the agency believes the BNPL, which is increasingly being offered by major payment providers, could be beneficial to certain consumers. Apple Pay recently announced a partnership last week with Goldman Sachs offering consumers the ability to pay for purchases with four interest-free installments over several months.

“I believe CFPB is really positive about the product because lenders get cash flow to people who don’t have traditional loans,” said Richard Perr, chairman of the consumer financial services practice group at law firm Kaufman Dolowich Voluck. “It felt like it was a CFPB promotion because they look at these products from the mainstream companies as providing reasonable credit to the people who need it.”

As part of its partnership with Goldman Sachs, Apple will offer Apple Pay Later, which will allow users to pay for purchases in four interest-free payments every two weeks.

As part of its partnership with Goldman Sachs, Apple will offer Apple Pay Later, which will allow users to pay for purchases in four interest-free payments every two weeks.

Bloomberg News

But experts have very different interpretations of how the CFPB will operate based on its Blog post dated July 6th.

Some say the bureau is just starting to pay attention to the product and that federal and state regulators may increase oversight.

“The CFPB felt worried enough to warn consumers about this, so this may only be a first step and could mean they received a number of consumer complaints,” said Eric Johnson, partner at Hudson Cook LLP.

The CFPB said it is primarily concerned about consumers over-expanding their capabilities with BNPL products.

“BNPL can be a tempting payment option for many consumers because it makes it easy to buy something today and pay for it later,” the bureau said. “Since you can qualify for the BNPL without going through a tough credit check, make sure you have a good understanding of your finances and whether payments will fit into your budget.”

Lenders are promoting BNPL products as a way for consumers to better manage their cash flow and avoid falling into debt traps. Unlike payday loans, which can be rolled over, consumers who fail to pay the BNPL advance have to pay late fees and cannot use the product again until their outstanding balance is paid off.

Jareth Seiberg, managing director of Cowen Washington Research Group, wrote in a research note that the blog post “is about the same bland discussion of a financial product that the CFPB could do.”

“There is only the harshest buy-now-pay-later risk warning to consumers,” he said.

But Seiberg added that it would be a mistake to read the CFPB as a proposal to protect BNPL products. “We are still awaiting regulation and enforcement,” he wrote.

While the BNPL may seem like a credit card in the sense that consumers avoid interest if they pay off their debt early, the product has unique features. Lenders do not retrieve a consumer’s credit report to determine the ability to repay an advance.

BNPL lending is also not regulated in the same way as bank lending. Some experts believe that as the market expands, there will be pressure to tighten rules and regulations regarding products. For example, the Truth in Lending Act technically only applies to a consumer loan that is subject to a financial fee or is payable in more than four installments.

However, many BNPL providers disclose TILA information in their payment agreements, even if not required.

“The key point for us is whether more complaints will start to come as Buy Now Pay Later continues to grow,” Seiberg wrote. “If this happens, we believe the CFPB will feel obligated to act. And for us, this means considering the claim on the possibility of repayment. “

The CFPB Blog was written by four authors including Laura Udis, CFPB Small Marketplace Manager and Hire Purchase Program Manager. Udis is a former First Assistant Attorney General of Colorado and a former senior attorney for the Consumer Federation of America.

“She knows the consumer credit code and consumer protection laws, and this is causing heightened concern about this rather innocuous blog post,” Johnson said.

BNPL lenders had little or no control over the US situation, with the exception of one California regulation.

Afterpay, a Melbourne-based firm that is one of the largest BNPL players in the US, has agreed to a settlement. last year with California regulators for refusing to obtain a state license. Afterpay has returned nearly $ 1 million in commissions paid by California-based customers.

Regulators are starting to take a closer look at how the BNPL industry works, given that fees are charged primarily to merchants rather than high-interest consumers.

Australia Department of the Treasuryfor example, late penalties have been found to be as high as 68% at an annual interest rate, and that 30% of BNPL firms’ revenues come from what regulators call bad debt or consumption debt.

With the BNPL, the merchant pays the payment service provider, in effect, to increase sales. Research has shown that the credit risk for BNPL is much higher than for traditional credit.

“The retailer tells the lender to take out all kinds of credit, and the retailer is essentially compensating the lender for the excess risk,” said Todd H. Baker, senior fellow at Columbia Richman Center and managing director of Broadmoor Consulting LLC. “The merchant pays for the risk of non-payment of the short-term advance without interest.”

But others suggest that CFPB may view BNPL in a more favorable light than payday lending, especially with larger players like Apple and Goldman Sachs determining that they are willing to take on the credit risk.

According to Bloomberg, as part of the collaboration, the tech giant will offer Apple Pay Later, which will give users the ability to pay for purchases with four interest-free payments every two weeks or spread out payments over several months with interest.

“We are seeing the opposite trend, with major companies seeing economic value in this,” Perre said. “I think this is the first step in providing people looking for payday loans who may not need payday loans because they provide another loan product that is halfway between payday loan and credit card.”

Credit bureau reporting can also get the attention of the CFPB. BNPL providers usually don’t report missed payments, but they also don’t report consumers who pay on time and can benefit from positive credit reporting.

“Buy now / pay later lenders don’t collect the credit report earlier, and the good news is that if you have a problem loan, you don’t have to worry about it when getting a short-term loan,” Perr said. “But the flip side of the coin is that if you are trying to get a loan, you are also not creating a credit history.”

And the CFPB has warned that in some cases, a missed BNPL payment negatively impacts consumer credit histories.

“While most BNPL companies do not currently report to consumer reporting companies, some do,” the bureau said. “If you are late in payment and BNPL reports your late payment to the credit company, it could harm your credit history.”

In addition, consumers do not have the same protection when returning items purchased using the BNPL because they do not have the same legal protection as credit cards.

“If I buy a TV from Best Buy and use my American Express card and the TV breaks down, I call Amex and they go to the dispute and I don’t pay because the issue becomes the point of dispute,” Perr said. “If you pay through the BNPL, you may still need to make payments even after you return the product.”

Investors are investing billions in BNPL products from Klarna, a Swedish payment company and Confirm holdingswhich went public this year.

Some see the rapid proliferation of the BNPL in other countries as a warning sign that regulatory oversight is imminent.

“BNPL lending quickly got out of hand in Australia,” Baker said. “Consumers have no idea how BNPL products work.”

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