Federal rules expanded to protect shoppers who buy now, pay later

Regulators are trying to catch up with the booming “buy now, pay later” business.

Increasingly popular point-of-sale loan providers must now offer some of the same protections afforded to credit card users, including the right to dispute charges and demand reimbursement for returned purchases, it announced Wednesday the Consumer Financial Protection Bureau.

The White House applauded the move, calling it part of a “broader crackdown on corporate scams.”

“The Biden-Harris Administration will continue to take steps to protect consumers and keep more money in Americans’ pockets,” Jon Donenberg, deputy director of President Biden’s National Economic Council, said Wednesday in a statement sent by email.

The agency, which protects consumers from financial abuse, is taking the action in response to complaints from customers who are bypassed by late payment providers when they dispute charges or try to return items, officials said Tuesday of the CFPB during a press briefing.

Welcomed by shoppers as a way to make interest-free purchases, from clothing to travel, the loans allow borrowers to pay over time, usually in four installments over six weeks. Use of loans increased during the pandemichelping to spur a boom in online shopping, the CFPB noted.

Similar to credit cards

An interpretive rule issued by the agency states that BNPL lenders are actually credit card providers and therefore must provide consumers with the basic protections that accompany the purchase of plastic items.

“When consumers choose to buy now and pay later, they don’t know if they will get their money back if they return their product or if the lender will help them if they didn’t get what was promised” , said Rohit, director of the CFPB. Chopra said in a statement. “Whether a shopper swipes a credit card or uses “Buy Now, Pay Later,” they are entitled to important consumer protections under long-standing laws and regulations already in place.”

Additionally, BNPL lenders will be required to provide users with periodic billing statements similar to those issued for traditional credit card accounts, according to the interpretive rule, which takes effect in 60 days, the agency said.

Under the new rules, BNPL lenders must now:

  • Investigate consumer-initiated disputes, suspending payment requirements during the process.
  • Refund returned products or canceled services to consumers’ accounts.
  • Provide consumers with periodic billing statements like those received for standard credit cards.

Although BNPL lenders will be subject to stricter government oversight, the CFPB’s new rule does not require providers to verify that borrowers are able to repay the loans, as consumer advocates have demanded.

“We believe this interpretive rule largely spares the industry the most onerous requirement, which would be to subject borrowers to an ability-to-repay test. On that front, it’s a victory,” said Jaret Seiberg, analyst at TD Cowen. Washington Research Group, said in a report.

Conversely, consumers remain vulnerable to a sector that includes some companies that are not transparent about their business model, according to the US PIRG Education Fund.

“We are particularly concerned about young people, who are the main target demographic for BNPL plans and are encouraged to purchase products they do not need and cannot afford. They often don’t understand what they’re getting into because the information is vague. This needs to change,” U.S. consumer watchdog Teresa Murray said in an emailed statement Wednesday.

Debt risk

Buy now, pay later is increasingly being offered as an option alongside credit card payments, with the industry’s five largest players generating $24 billion in loans in 2021, a more than 10-fold increase from the 2 billion dollars in 2019, according to the CFPB.

Half of shoppers ages 25 to 44 use BNPL, according to Bankrate. This option could generate up to $84 billion in spending, an increase of 13% from last year, according to Adobe Analytics.

But BNPL plans can include high fees for those who miss paymentsConsumer Reports warned last year.

Loans offered by companies such as Affirm, Afterpay, Klarna, PayPal, and Zip are generally not reported on consumer credit reports or consumer credit scores. This has raised concerns that users are taking on too much debt, which is not transparent to other lenders or regulators.

Apple bucked that trend by announcing in February that it would report loans made through its Apple Pay Later program to Experian, one of the credit bureaus.

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Sara Adm

Aimant les mots, Sara Smith a commencé à écrire dès son plus jeune âge. En tant qu'éditeur en chef de son journal scolaire, il met en valeur ses compétences en racontant des récits impactants. Smith a ensuite étudié le journalisme à l'université Columbia, où il est diplômé en tête de sa classe. Après avoir étudié au New York Times, Sara décroche un poste de journaliste de nouvelles. Depuis dix ans, il a couvert des événements majeurs tels que les élections présidentielles et les catastrophes naturelles. Il a été acclamé pour sa capacité à créer des récits captivants qui capturent l'expérience humaine.
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