Consumer Reports praises CFPB’s new rule and calls for additional BNPL reforms
WASHINGTON, D.C. – Under an interpretive rule issued by the Consumer Financial Protection Bureau today, lenders that offer buy now, pay later (BNPL) loans will be required to provide borrowers with certain protections, namely the right to dispute charges and to demand a refund after returning a product they purchased Consumers currently have these rights when they make purchases with credit cards. Consumer Reports applauded the new rule and urged the CFPB to extend additional protections to BNPL users to ensure they are treated fairly.
BNPL loans are an extremely fast-growing form of lending that typically enables consumers to split the cost of purchases into four or more payments. The most common BNPL loans are “pay-in-four” products, where consumers pay 25 percent of the cost of the item at the point of sale, and the remaining balance in three payments of 25 percent over the next six weeks.
“Buy now, pay later loans are wildly popular but they lack some critical consumer protections that leave consumers at risk,” said Jennifer Chien, a senior policy counsel for financial fairness at Consumer Reports. “Consumers who use BNPL loans often get the runaround when they are unhappy with a purchase and can face weeks of hassle trying to get a refund. The CFPB’s new rule will help ensure consumers can dispute charges and get their money back promptly just as they are guaranteed by law when they make a purchase with a credit card.”
When consumers make a purchase using a BNPL loan, they don’t get the same “chargeback” rights that come with credit cards. As a result, if the consumer needs to return a product or never even received it, they must contact the seller and lender before they can stop making payments and get a refund. The process can take several weeks according to the CFPB. With credit cards, a consumer can simply alert the credit card company and stop payment if it hasn’t already been credited.
About 13 percent of all BNPL purchases get returned, according to the CFPB. A nationally representative CR survey of 2,013 U.S. adults in August 2022 found that 4 percent of people who have used BNPL said they had difficulty stopping payments after they returned an item, and 5 percent said they had difficulty getting a refund.
Last year, CR published an evaluation of BNPL apps that found that users can end up paying penalty fees if they fall behind on payments or misunderstand the terms of the loan they’ve been offered. Fraudulent transactions are a well-known industry problem, but the apps don’t always alert consumers when suspicious charges are detected like credit card companies. Most apps limit consumers’ ability to control the personal data that is collected about them or don’t make privacy controls easily accessible.
A separate CR report found that, while BNPL loans are typically marketed as interest-free, that’s not always the case as providers expand into longer term options that can come with steep interest charges. Unlike pay-in-four BNPL loans, some of these newer offerings can trigger a hard check on your credit, which can lower your credit score. And failing to pay on time can also make your credit score dip. It’s also possible that these longer-term loans, by making big-dollar advances so readily available, may tempt consumers to spend more than they intend or can afford to pay back, especially when interest is added in.
“The CFPB’s new rule is an important step towards extending basic rights to BNPL users, but the Bureau should take further action to fully protect consumers,” said Chien. “The CFPB should establish new rules for this largely unregulated market so consumers are treated fairly and enjoy more of the same rights and benefits they get when using other forms of credit.”
CR is urging the CFPB to adopt a number of other rules for all BNPL loans to better protect consumers, including:
- Enhanced disclosure and transparency: Require BNPL providers to make clearer distinctions between interest-free and interest-bearing loans and develop a standardized format for disclosing product features and all fees and charges for pay-in-four BNPL loans.
- Ability to repay: Require BNPL providers to assess a consumer’s ability to repay and put in place other responsible lending practices.
- Credit reporting: Require BNPL providers to report customers’ payment history to credit bureaus and develop an appropriate approach for how to treat BNPL data.
- Data privacy: Establish strong data privacy measures, particularly on the collection, use and sharing of customer data.