CFPB Takes Aim At BNPL Regulatory Loopholes In The US

June 28, 2024
The US Consumer Financial Protection Bureau (CFPB) has vowed to close regulatory loopholes that benefit buy now, pay later (BNPL) lenders, in an effort to regulate the sector in the same way as credit cards.

The US Consumer Financial Protection Bureau (CFPB) has vowed to close regulatory loopholes that benefit buy now, pay later (BNPL) lenders, in an effort to regulate the sector in the same way as credit cards.

Speaking this month at a Senate Banking Committee hearing, CFPB director Rohit Chopra on a new interpretive rule that could soon affect the BNPL sector.

“The CFPB cannot be behind the eight ball when it comes to BNPL,” said Chopra, responding to questions from Senator Jack Reed (D-RI).

“We have tried to stay ahead of it. It is fast-growing, it's an important part of our consumer credit market, and we need to make sure it's growing on merits, not based on regulatory loopholes.”

BNPL providers are already subject to some federal and state oversight. The CFPB has enforcement authority over providers of credit, and it has authority to supervise any non-depository covered persons, such as BNPL companies, in certain circumstances.

Some states consider BNPL to be consumer credit and require state licensing or registration, as well as compliance with state consumer credit laws, while other states do not require licensing or registration for “interest-free” BNPL products.

Chopra, who was on Capitol Hill to discuss the findings of the CFPB's semi-annual report to Congress, said the agency would benefit from greater authority to ensure that BNPL companies are subject to supervision. 

In May, the CFPB issued an  clarifying that many of the rules that apply to credit cards should also apply to BNPL products.

Senator Reed was sympathetic to Chopra’s demands, suggesting that the CFPB should “bring the biggest BNPL lenders under federal supervision in order to spot violations”.

Among lawmakers, additional concerns include the failure of credit reporting bureaus to include BNPL loans on their filings — a loophole that is causing increased anxiety for auto and mortgage lenders. 

The value of thoughtful regulation

dzܲԻ of all BNPL users worldwide live in the US. Affirm is one of the largest BNPL providers in the US, and its customer base is largely composed of Gen Z and Millennial users.

In a  responding to the CFPB’s interpretive rule, Affirm said it is encouraged by the regulator’s consistent attempts to promote industry standards. It also said that, in the case of BNPL, these standards “already reflect how Affirm operates”.

Speaking to žž, an Affirm spokesperson said the company has long been a vocal supporter of efforts, including thoughtful regulation, that can promote greater choice and transparency for consumers.

“We believe that consistent standards and a level playing field could be an opportunity for honest financial products to go further mainstream,” they said.

“Affirm is subject to extensive regulation and oversight, both directly and indirectly, by way of our partnerships with our originating banks, under federal law and under the laws of the states in which we operate.”

Affirm highlighted that it does not charge late fees or any other hidden fees, and each of its users receive "Truth in Lending" disclosure in line with Federal Reserve regulations on responsible credit provision.

“We underwrite every transaction, provide consistent and transparent disclosures and offer dispute and error resolution processes,” the spokesperson said.

CFPB enforcement spree against 'deceptive' lenders continues

During the hearing, Chopra gave further insight into the CFPB’s decision to launch an enforcement action last month against SoLo Funds, a non-bank peer-to-peer (P2P) lending platform.

The regulator alleges that SoLo Funds has engaged in “deceiving borrowers” and “illegally extracting fees” from them.

SoLo Funds advertises zero-interest loans, but the platform allegedly uses so-called “dark patterns” to ensure that almost every borrower pays a “tip” or a “donation”.

Although SoLo funds does not market itself as a BNPL company, Chopra said it is being treated as such by the bureau.

“If they are pushing people into a finance charge, federal law is pretty clear that they need to disclose it clearly with an interest rate so that people can compare,” said Chopra.

“And as Senator Scott was mentioning, we need to be able to look and compare so the best player wins.”



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