CFPB initiates procurement process now, pays lenders later

The U.S. Consumer Financial Protection Bureau plans to subject “buy now, pay later” lenders to the same vigorous oversight as credit card companies, saying the short-term financing industry shreds consumer data in a way that limits consumer protections. Privacy is at risk.

Considered as an alternative to traditional credit cards, the Buy Now, Pay Later model allows consumers to pay off the loan in a few installments, typically in four interest-free increments. The service, provided by several firms such as Klarna and Afterpay, grew in popularity during the pandemic.

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CFPB officials said the consumer watchdog body, which does not currently regulate the industry, is planning to issue guidance to oversee lenders and subject them to supervisory examinations.

“Buy now, pay later companies are harvesting and leveraging data,” CFPB director Rohit Chopra told reporters in a conference call on Wednesday. “Through our proprietary interface, they can see what products we buy through product placement.”

The bureau also referred to the increase in loan approval rates in a report released on Thursday after nearly a year of investigation. Apparel and beauty merchants used more than 80% in 2019, but only 58.6% in 2021, as more consumers shop now, paying later for services like travel, pet care, groceries and gas .

More customers are also getting approved for loans. According to the report, in 2021, 73% of applicants were approved as compared to 69% in 2020.

The bureau outlined a number of risks for consumers who use to purchase now, pay off debt later, including a lack of consumer protections compared to traditional credit card companies, data harvesting and monetization of customer data, loans. Involves accumulating and “debt stacking” – or taking on multiple loans. same time.

Late fees are also becoming common. The CFPB found that 10.5% of unique users were charged at least one late fee in 2021, compared to 7.8% in 2020. And according to Chopra, adoption of the service is increasing across all age groups.

The CFPB first announced its investigation into the industry in December 2021.

The bureau can oversee a given purchase, paying the provider later in some circumstances, but the license of the firms also varies from state to state. Based on the report, Chopra has asked the CFPB to take several steps to mitigate the risks to the industry.

“We want to ensure that Buy Now, Pay Later firms are subjected to due examination like regular credit card firms,” ​​Chopra said.

The CFPB will determine how the credit card industry incorporates Buy Now, Pay Later features. He added that staff will also identify customer monitoring processes that may need to be eased.

Overall, firms will be subject to appropriate supervisory examinations that align with regular credit card agencies, Chopra said, but the proposed changes are ultimately the responsibility of individual firms.

“We will leave it up to the companies to decide what they think is the best solution,” a CFPB official told reporters this week.

In an analysis released Thursday, credit rating company Fitch Ratings said buy now, pay later. Companies offer more flexible financing options to low-income buyers and a “pay in four” installment model, in particular, is here to stay. Is for. But analysts caution that the various risks associated with the services deserve scrutiny.

“While no surprise, the CFPB’s report reflects a more intense regulatory scrutiny at a time when buy-now-pay-laters are facing issues in the form of rising funding costs, weak credit performance and increased competition. It is,” said Mike Tiano, senior director of Fitch Ratings.

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