A&B Abstract:

On December 6, 2023, the Office of the Comptroller of the Currency (OCC) issued a bulletin aimed at providing guidance to national banks and federal savings associations (“Financial Institutions”) involved in “buy now, pay later” (BNPL) lending. The advisory emphasizes the need for these Financial Institutions to carefully manage risks associated with BNPL, focusing on aspects such as underwriting, repayment terms, pricing, and safeguards to protect customers. Additionally, the OCC stresses the importance of clear and prominent marketing materials and disclosures.

The Bulletin

While BNPL products may vary, the bulletin focuses on BNPL loans which involve four or fewer installments without finance charges, and that are commonly offered at the point of sale. Such BNPL products are distinguished from more traditional installment loans with payment terms greater than four installments or that charge interest or carry other finance charges. These loans have become increasingly popular, especially among younger individuals and those with limited credit history.

The OCC identifies various risks related to BNPL loans for both lenders and consumers, including credit, compliance, operational, strategic, and reputational risks. Specific concerns include potential borrower overextension, limited applicant credit history, unclear disclosure language, challenges with merchandise returns and merchant disputes, operational and compliance risks related to third-party relationships, and increased operational risk due to the highly automated nature of BNPL lending.

Further details on risks include the potential for elevated first payment default risk, additional fees for borrowers due to overextension, and the possibility that credit reporting agencies may lack visibility into BNPL activity.

The OCC’s guidance advises Financial Institutions engaged in BNPL lending to establish robust risk management systems, including prudent lending policies for risk identification, measurement, monitoring, and control. Regarding credit risk, the bulletin emphasizes the importance of sound charge-off practices, allowances for credit losses, and timely reporting of comprehensive information to credit bureaus under the Fair Credit Reporting Act.

The guidance also provides recommendations for operational risk management. It encourages Financial Institutions to assess and mitigate fraud risks, subject BNPL lending process models to sound model risk management and integrate BNPL lending into broader compliance management systems. Additionally, it highlights the need for Financial Institutions engaging third parties in BNPL lending to incorporate such relationships into their third-party risk management protocols.

Takeaway:

Given the OCC’s focus on the risks associated with BNPL products, now is a good time for Financial Institutions engaged in BNPL Lending to ensure that their compliance management programs are robust enough to ensure compliance with the OCC’s guidance.

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