Last week, the Consumer Financial Protection Bureau announced that it issued a series of orders to five companies that offer "buy now, pay later" credit to consumers, directing them to provide information to the agency about their loan programs. The orders were issued to Affirm, Afterpay, Klarna, PayPal, and Zip. The CFPB said that it issued the orders because it is concerned about accumulating debt, regulatory arbitrage, and data harvesting in an evolving consumer credit market.
As part of the announcement, CFPB Director Rohit Chopra said, "Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too."
After collecting the information from these companies, the CFPB plans to publish aggregated findings sharing what it has learned from the inquiry, in order to "illuminate the range of these consumer credit products and their underlying business practices."
The inquiry is focused on three key areas.
First, the CFPB is concerned about how consumers are accumulating debt. The CFPB explained that while old-style layaway installment loans were typically used for occasional big purchases, now, consumers can become regular users of "buy now, pay later" programs. The CFPB said, "Because of the easy of getting these loans, consumers can end up spending more than anticipated." The CFPB also expressed concerns that it may be difficult for consumers to track when payments are due on multiple loans and that, if they can't afford the payments, they could end up paying additional charges both from the consumer's bank and the credit provider.
Second, the CFPB is concerned that some "buy now, pay later" credit companies may be engaging in regulatory arbitrage -- in other words, that they may not be adequately evaluating what consumer protection laws apply to their products. The CFPB said that some of the credit offered may not provide required disclosures or just may not offer the protections that are available to consumers if they were to make the purchase using a credit card.
Finally, the CFPB is also looking into the companies' data collection practices. Specifically, the CFPB wants to understand the companies' practices around data collection, behavioral targeting, and data monetization, so that it can assess the risks that data harvesting may create for consumers.
Marketers frequently offer to consumers the ability to buy products on credit through third party credit providers. With the CFPB taking a close look at their practices, now is a good time for marketers to look at how these credit offers on presented on their sites as well, to ensure that they are presented in compliance with applicable credit advertising laws and that they are otherwise not presented in a misleading manner.
This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.
