On January 2, New York Governor Kathy Hochul unveiled her 2024 consumer protection agenda, which includes plans to regulate the “buy now, pay later” (BNPL) industry. Specifically, Governor Hochul plans to propose legislation to require BNPL providers to be licensed in the state and to authorize the New York State Department of Financial Services to propose and issue regulations for the industry. According to Governor Hochul, “New Yorkers are increasingly turning to [BNPL] loans as a low-cost alternative to traditional credit products to pay for everyday and big-ticket purchases. This legislation and regulations will establish strong industry protections around disclosure requirements, dispute resolution and credit reporting standards, late fee limits, consumer data privacy, and guidelines to curtail dark patterns and debt accumulation and overextension.”
BNPL loans, also known as “point-of-sale installment loans” or “pay-in-4” loans, have seen a rapid increase in recent years. In a typical BNPL transaction, the lender pays the merchant for the good or service and takes on the responsibility of collecting payments from the borrower. To compensate for the credit risk, merchants pay a “merchant discount” to the lender. The lender then collects the full purchase price through installment payments from the borrower. If the borrower does not pay on time, the lender may, at times, charge late fees and refuse to make additional BNPL loans to the borrower until the borrower brings the account current.
While BNPL loans can provide consumers with a convenient and relatively low-cost financing alternative, Governor Hochul is not alone in suggesting that these loans can also carry potential risks for both banks and consumers. As discussed here, just last month, the Office of the Comptroller of the Currency (OCC) issued guidance advising banks engaged in BNPL lending to operate within a risk management system that is commensurate with the associated risks and designed to capture the unique characteristics of BNPL loans. Specifically, the OCC advised that banks should establish policies and procedures for BNPL lending that address loan terms, underwriting criteria, methodologies to assess repayment capacity, fees, charge-offs, and credit loss allowance considerations.