On March 25, the Illinois State Attorney General Kwame Raoul, along with 18 other state attorneys general (state AGs),[1] provided comments to the Consumer Financial Protection Bureau (CFPB) related to the CFPB’s inquiry into companies that offer consumers the opportunity to divide the cost of their purchases into multiple installments, also referred to as “buy now, pay later” (BNPL) products. The 19 state AGs provide their support and offer seven recommendations in response to the CFPB’s inquiry in their comments.

For context, BNPL products often require a 25% down payment due at checkout; the balance is then typically paid down no more than four installment payments. The application process for BNPL products is quick and involves relatively little information from the consumer. The product often comes with no interest, although there are fees for late payments. BNPL products afford consumers more payment flexibility and — as some in the industry maintain — are a safer and more accessible alternative to credit card debt since BNPL is available to consumers with scant or subprime credit histories.

But BNPL products can also come with a cost. According to the CFPB’s press release from December 16, 2021, the CFPB is concerned about three aspects of the BNPL market:

1. Debt accumulation. The flexibility of this payment option may harm consumers who take on several payment plans. If consumers are unable to make their payments, they may get charged both by their bank account and the BNPL provider.
2. Regulatory arbitrage. Since BNPL companies may be inadequately evaluating which laws apply to their productions, the CFPB’s inquiry aims to determine whether BNPL products are providing the correct disclosures, whether they apply protections to BNPL products akin to some of the protections provided by credit card companies, and whether the BNPL company is following the right rules for late fees and other policies.
3. Data collection. Some BNPL companies have used the payment histories of their customers for commercial benefit. The CFPB seeks to better understand how BNPL companies collect and monetize data to ensure that BNPL companies are complying with applicable regulations and that consumers are not being harmed.

As explained in the March 25 press release from Illinois Attorney General Kwame Raoul, the CFPB sought input from state AGs as part of this inquiry. The comments from this contingency of 19 state AGs urge the CFPB to prioritize robust consumer protections in this industry and take the position that BNPL products are credit products, unlike the position espoused by many BNPL companies.

While the concerns from the state AGs largely echo the three areas that the CFPB outlined in its December 2021 press release and similarly cite the exponential growth of this particular product, the letters make the following specific recommendations:

• First, the state AGs pointedly criticized BNPL companies for failing to provide robust underwriting or any consideration of a consumer’s ability to repay the “loan.” Consequently, the state AGs ask the CFPB to identify which steps, if any, these companies take to assess a consumer’s ability to repay.

• Second, the state AGs encourage the CFPB to analyze BNPL providers’ relationships with credit reporting agencies to ensure that the companies are furnishing accurate information to credit bureaus and addressing consumer credit reporting disputes in a fair and timely fashion.

• Third, the state AGs recommend that the CFPB evaluate the disclosures that BNPL companies are making to consumers and, if necessary, to make regulations to ensure proper disclosures of reasonable fees and charges.

• Fourth, because some BNPL companies may not provide the same protections as credit card companies related to returning and disputing faulty merchandise, the state AGs ask the CFPB to review the dispute resolution processes from BNPL providers.

• Fifth, recognizing the potential for consumers to be overwhelmed with payments, the state AGs encourage the CFPB to review BNPL providers’ debt collection practices when consumers default on their payments.

• Sixth, aligned with the CFPB’s concern regarding data collection, the state AGs recommend that the CFPB review BNPL companies’ privacy policies to determine how they collect, use, and protect consumer data.

• Last, the state AGs urge the CFPB to examine partnerships between BNPL companies and providers of unaccredited online courses, such as “tech boot camps that have established partnerships with non-bank lenders.”

Our Take. This letter shows that regulators, both at a federal and state level, have continued their focus on the BNPL industry. State AGs in their comment letter to the CFPB are demonstrating an even stronger regulatory stance than the federal government, outrightly characterizing BNPL products as “credit products,” and calling for oversight on all aspects of these products from underwriting to debt collection. Additionally, the 19 state AGs are considering expanding the focus of this inquiry to companies that partner with the BNPL companies, including for nonaccredited education companies. Therefore, BNPL companies and their partners should closely monitor how the CFPB reacts to the state AGs’ letter, carefully review their internal compliance policies, and prepare for additional scrutiny from state and federal regulators in the months ahead.

[1] The state AGs of Illinois, California, Colorado, Connecticut, Delaware, Hawaii, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington, as well as the Hawaii Office of Consumer Protection, signed this letter.