Duckworth Joins Reed, Brown to Call on the Consumer Financial Protection Bureau to Supervise “Buy Now, Pay Later” Lenders

March 24, 2023

Duckworth Joins Reed, Brown to Call on the Consumer Financial Protection Bureau to Supervise "Buy Now, Pay Later" Lenders

[WASHINGTON, D.C.] - In an effort to better protect American consumers and ensure that financial firms offering buy now, pay later (BNPL) products comply with consumer protection laws, U.S. Senator Tammy Duckworth (D-IL) joined U.S. Senators Jack Reed (D-RI) and Sherrod Brown (D-OH) in sending a letter to Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra, urging the CFPB to quickly bring the nation's largest BNPL providers under federal supervision.

"Supervisory expectations for BNPL lenders should keep pace with the explosion of consumer interest in these loans. BNPL providers are not currently subject to Federal supervision by the CFPB. Rather, they may be subject to supervision only by the states in which they do business. Some states require registration and conduct examinations, while others do not. This patchwork system may allow potential violations of consumer protection laws to fall through the cracks, leaving consumers exposed to harm. BNPL borrowers may be particularly vulnerable. According to CFPB research, they 'exhibit measures of financial distress that are statistically significantly higher than other consumers,'"the Senators wrote.

BNPL products offer consumers the option to purchase a product and pay for it in four equal installments, with each repayment typically due every two weeks. As more consumers turned to online shopping in the midst of the COVID-19 pandemic, the number of BNPL loans taken out by customers skyrocketed. According to CFPB research, the five largest market participants originated $24.2 billion in BNPL loans in 2021 - a tenfold increase since 2019. Despite the soaring use of BNPL credit, the CFPB does not currently examine the lending practices of the nation's largest BNPL providers.

With big tech companies planning to enter the BNPL market, new twists on the existing BNPL product are raising questions about concentration of market power and threats to privacy given incentives to monetize consumer data. CFPB supervision of the largest BNPL lenders could help spot violations of consumer financial protection laws or abusive practices before they spiral out of control and have widespread impacts on consumers.

"Congress provided the CFPB with supervisory authority over 'larger participants' in consumer finance markets. The CFPB has rulemaking authority to determine who is a 'larger participant,' and we urge you to exercise this authority to supervise the largest BNPL lenders. Any supervisory program should be tailored to the size of each BNPL lender, the volume of its lending activity, and the extent of existing state oversight. Consumers have an expectation that whatever form of credit they choose, their lender will deal with them honestly and will comply with the law," the Senators continued. "That's why Federal supervision should not turn on whether a borrower uses BNPL credit from a nonbank or a credit card issued by a bank."

In urging the CFPB to apply its existing authority to supervise the nation's largest BNPL lenders, the senators called for on-site examinations to review lenders' books and records, interview management and evaluate compliance systems. Furthermore, the senators said the CFPB should issue confidential examination reports and compliance ratings. Finally, the senators urge the CFPB to aggressively and publicly enforce the consumer financial protection laws if lenders fail to address deficiencies identified through a Federal supervision and examination process.

Full text of the letter is available here and below.

The Honorable Rohit Chopra

Director, Consumer Financial Protection Bureau

1700 G St. NW

Washington, DC 20552

Dear Director Chopra,

We write to urge the Consumer Financial Protection Bureau (CFPB) to move quickly towards bringing the largest buy now, pay later (BNPL) lenders under Federal supervision, in order to better protect consumers from unfair, deceptive and abusive acts and practices.

BNPL is marketed as a form of interest-free credit. The typical "pay-in-four" BNPL product allows consumers to purchase a product and then pay back the loan over four equal installments, with the first installment akin to a down payment. In the mid-2010s, BNPL became a popular alternative to credit cards for online retail purchases, particularly among younger consumers. Its popularity soared during the COVID-19 pandemic, as more consumers turned to online shopping. According to CFPB research, the five largest participants in the BNPL market originated $24.2 billion in BNPL loans in 2021. That's a tenfold increase since 2019. More recently, big tech companies have entered the market. These new BNPL products raise additional concerns regarding concentration of market power and threats to privacy given these lenders' incentives to monetize consumer data.

Supervisory expectations for BNPL lenders should keep pace with the explosion of consumer interest in these loans. BNPL providers are not currently subject to Federal supervision by the CFPB. Rather, they may be subject to supervision only by the states in which they do business. Some states require registration and conduct examinations, while others do not. This patchwork system may allow potential violations of consumer protection laws to fall through the cracks, leaving consumers exposed to harm. BNPL borrowers may be particularly vulnerable. According to CFPB research, they "exhibit measures of financial distress that are statistically significantly higher than other consumers."

Congress provided the CFPB with supervisory authority over "larger participants" in consumer finance markets. The CFPB has rulemaking authority to determine who is a "larger participant," and we urge you to exercise this authority to supervise the largest BNPL lenders. Any supervisory program should be tailored to the size of each BNPL lender, the volume of its lending activity and the extent of existing state oversight. Consumers have an expectation that whatever form of credit they choose, their lender will deal with them honestly and will comply with the law. That's why Federal supervision should not turn on whether a borrower uses BNPL credit from a nonbank or a credit card issued by a bank.

Federal supervision means on-site examinations to review lenders' books and records, interview management and evaluate compliance systems. It means issuing confidential examination reports and compliance ratings to address problems before they spiral out of control and cause consumer harm on a wide scale. And it means aggressively and publicly enforcing the consumer financial protection laws against lenders who fail to address issues raised during the examination process.

We appreciate your attention to this important matter and look forward to your prompt reply.

Sincerely,

-30-

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