House Committee Considers Regulating Buy Now Pay Later
The House Financial Services Committee held a hearing last week to explore regulating Buy Now Pay Later, earned wage access, and overdraft protection services.
Rep. Stephen Lynch, a Massachusetts Democrat known for his moderate views, chaired the hearing. The witness panel included two industry voices: Penny Lee, CEO, Financial Technology Association, and Brian Tate, CEO and president, Innovative Payments Association; two consumer advocates: Lauren Saunders, associate director, National Consumer Law Association and Marisabel Torres, director of California policy, Center for Responsible Lending; and Kristen Broady, a policy fellow at the Brookings Institution.
The committee identified five areas of concern:
- transparency — do consumers understand these products?
- potential for unsustainable levels of debt
- use of consumer data/lack of disclosure to the credit bureaus
- exploitation around spending patterns
- evasion of the Truth in Lending Act (TILA)
There was common ground at the hearing around the benefits of using technology to reduce costs, prices, speed up delivery, and increase inclusion and convenience for underserved populations. It was also easy for members to see the merit in allowing consumers to comfortably make purchases and spread out payments over time. This is the essence of Buy Now Pay Later. According to the Financial Technology Association, 45 million Americans sought BNPL loans last year, spending around $21 billion.
Members of the committee also viewed helping people avoid overdraft fees and access money they had already earned without waiting two weeks for a paycheck as positive. However, the tipping structure around overdraft protection was questioned, and some members challenged the fees associated with paycheck advances.
More meaningful discussion was hampered by a lack of reliable data about how these services are being used. The information that was put forth was seemingly contradictory.
- Lauren Saunders, associate director, National Consumer Law Association, cited a Credit Karma study that found one-third of BNPL users had fallen behind on their payments and seen their credit scores decline. She also pointed to a report from a bank in the United Kingdom that 1 out 10 BNPL users were overdrawn on their accounts.
- Penny Lee of the Financial Technology Association, which includes major BNPL providers like Klarna, AfterPay, and Sezzle, countered that 97% of BNPL users do not incur a late fee. Lee said members of the FTA did not report borrower performance good or bad to the credit bureaus. Lee also asserted that private companies were actively working with credit bureaus so they could capture data correctly about performing loans repayment rates and so borrowers aren’t penalized for frequent use.
Members asked the panel about a variety of regulatory scenarios.
1. BNPL companies would be required to report credit history to the credit bureaus
2. A minimum age would be set for borrowers
3. Classify EWA advances as credit under the Truth in Lending Act
4. Limit how consumer data can be gathered and used
5. Require clear disclosures for BNPL and other products
Perhaps predictably, consumer advocates wanted the Consumer Financial Protection Board to collect additional data while industry groups strove to paint a picture of effective self-regulation.
To date, one bill is pending before the committee: the Overdraft Protection Act of 2021 (H.R. 4277), which would seek to limit abuse of overdraft fees. A related bill, the Stop Overdraft Profiteering Act of 2021 (S. 2677), is pending in the Senate Committee on Banking, Housing, and Urban Affairs.
To learn about how modern infrastructure can help reduce risks of BNPL for borrowers and lenders, read Canopy Servicing CEO Matt Bivons’ recent TechCrunch article, “Balancing Risk: Modern Architecture’s Role in the BNPL Playbook.”
