US consumer finance regulator to outline credit card-like BNPL protections

The US Consumer Financial Protection Bureau (CFPB) is set to outline new rules for buy now, pay later (BNPL) firms to ensure consumers are covered by many of the same protections established for credit cards.

CFPB director Rohit Chopra

The regulator will focus on three key areas: inconsistent consumer protections, data harvesting and monetisation, and debt accumulation and overextension.

Following a report into BNPL firms, which comes after the regulator announced a market monitoring inquiry in December 2021, the CFPB found that the sector has grown tenfold since 2019, with the five firms surveyed originating 180 million loans totalling more than $24 billion in 2021.

CFPB director Rohit Chopra says BNPL is a “rapidly growing” type of loan that often substitutes for credit cards.

“We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a buy now, pay later loan,” Chopra adds.

Currently, BNPL firms are subject to inconsistent federal and state laws, with the CFPB exercising enforcement authority over credit providers and some states requiring BNPL firms to comply with state consumer credit laws, obtain licensing, or register with the relevant authorities.

To avoid harm to consumers, the CFPB will set out guidance or rules that hem BNPL firms much closer to credit cards in terms of regulation, as well ensuring that BNPL lenders are subject to relevant supervision.

The regulator will also address risks concerning data harvesting and identify the data surveillance practices that BNPL firms should avoid.

Additionally, to reduce the risk of borrower overextension, the CFPB will continue to address how the industry can develop appropriate and accurate credit reporting practices. The agency will also ensure the methodology used to estimate household debt burden is “rigorous”.

In April, the regulator said it was invoking a largely unused legal provision to increase scrutiny of nonbank financial institutions.