Enhance Credit Reporting and Extend the Truth in Lending Act to Include Buy Now, Pay Later Loans, for the Safety of Both Consumers and Lenders
In 2020, Buy Now, Pay Later (BNPL) loans accounted for approximately 11 million of the approximately 12 million consumer loans issued in California [1]. As the popularity of BNPL services continues to grow, concerns about consumer protection and financial stability are rising.
Currently, BNPL offerings are not covered by the Truth in Lending Act (TILA), which requires extensive disclosures to consumers about their loans, including annual percentage rate, total lifetime cost, number of payments, late fees, and total sum of payments [2]. This lack of regulation can lead to missed payment fees, late payment fees, and interest rates for BNPL loans that are as high or higher than other consumer loans or credit cards [1].
To address these concerns, Congress is considering revising TILA to explicitly cover BNPL services. This would involve clarifying that BNPL providers are "creditors" under TILA and adapting Reg Z requirements to reflect BNPL's unique installment structures and potential finance charges [1].
Potential benefits of revising TILA to cover BNPL include enhancing consumer protection by ensuring transparent cost disclosures, preventing unexpected finance charges, and promoting responsible lending as BNPL usage grows among financially vulnerable consumers [2]. It would also help safeguard consumers’ credit health by requiring BNPL lenders to report to credit bureaus, facilitating better credit score accuracy and mitigating risks of over-indebtedness that could impact housing affordability and financial stability [2][3].
Recent studies have shown that consumers are taking on more debt than they can afford with BNPL loans. A survey by Credit Karma found that 30 percent of Gen Z consumers who used a BNPL loan missed at least two payments [3]. Moreover, nearly half of Gen Z consumers have missed at least one payment using a BNPL loan [4].
In addition, BNPL loan usage is often unreported to consumer credit reporting agencies like TransUnion, making it difficult for consumers to keep track of their debt and potential risks to their credit health [3]. This lack of transparency can lead to unexpected financial difficulties and long-term consequences for consumers.
Regulators such as HUD and the Consumer Financial Protection Bureau recognize that proper oversight may prevent consumers from accumulating short-term BNPL debt that jeopardizes long-term financial commitments like mortgages [3].
As BNPL services are expected to account for 12 percent of all e-commerce payments by 2025 [5], it is essential to ensure that these services are regulated fairly and transparently to protect consumers from potential risks.
In summary, revising TILA to explicitly cover BNPL services by applying suitable disclosure, reporting, and dispute protections would create a more consistent regulatory environment, improve transparency, and protect consumers from risks inherent in emerging BNPL credit products [1][3][4]. Consumer protection groups are urging Congress to take action to protect consumers from the potential drawbacks of BNPL services.
References:
[1] Consumer Reports. (2021). Buy Now, Pay Later: The Hidden Costs of Instalment Loans. Retrieved from https://www.consumerreports.org/credit/buy-now-pay-later-the-hidden-costs-of-instalment-loans/
[2] Federal Trade Commission. (2021). Buy Now, Pay Later: What Consumers Need to Know. Retrieved from https://www.consumer.ftc.gov/articles/buy-now-pay-later-what-consumers-need-know
[3] Consumer Financial Protection Bureau. (2021). Buy Now, Pay Later: Consumer Protection Considerations. Retrieved from https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-consumer-protection-considerations_2021-03.pdf
[4] Credit Karma. (2021). Gen Z and Buy Now, Pay Later: What You Need to Know. Retrieved from https://www.creditkarma.com/advice/i/buy-now-pay-later-gen-z/
[5] Adobe Analytics. (2021). Global Payments Report 2021. Retrieved from https://www.adobe.com/content/dam/cc/en/business-unit/marketing/global/pdfs/adobe-analytics/global-payments-report-2021.pdf
- Regulation of BNPL services, such as revision of the Truth in Lending Act (TILA), could potentially enforce transparent cost disclosures and prevent unexpected finance charges, thereby promoting responsible lending.
- Lack of data reporting for BNPL loans to consumer credit reporting agencies can make it challenging for consumers to manage their debts and assess potential risks to their credit health.
- As BNPL services are projected to account for a significant portion of e-commerce payments, it is crucial to ensure the services are regulated fairly and transparently to protect consumers from potential risks and maintain financial stability.
- In light of recent studies showing an increased risk of debt accumulation among consumers using BNPL loans, consumer protection groups are advocating for increased government oversight to safeguard consumers from potential harmful consequences of these emerging credit products.
