Enhancing Credit Reporting and Extending the Truth in Lending Act to 'Buy Now, Pay Later' Loans for the Safety of Both Consumers and Lenders is Proposed by Regulators
In the rapidly evolving world of finance, a growing trend is Buy Now, Pay Later (BNPL) services. As more consumers, particularly Gen Z, adopt BNPL products, it has become increasingly crucial to revise the Truth in Lending Act (TILA) to ensure these services are transparent, consumer-friendly, and promote responsible usage.
Currently, many BNPL offerings do not trigger TILA’s cost-of-credit disclosure requirements due to the lack of traditional finance charges. To close this gap, TILA should explicitly classify BNPL offerings as credit products, subjecting them to disclosure requirements. New mandated disclosures should include a “key product information” summary before consumers enter agreements, detailing installment amounts, total repayment cost (including any late or incidental fees), repayment schedules, and the costs of nonpayment.
Given concerns about consumers taking on unaffordable debt through BNPL, TILA revisions should also mandate affordability assessments like those in conventional lending. This aligns with emerging proposals requiring creditworthiness checks for BNPL, ensuring consumers’ ability to repay BNPL obligations and mitigating the risk of over-indebtedness.
To promote informed usage, TILA should require lenders or BNPL providers to deliver clear, comprehensible educational materials at the point of sale and periodically thereafter. These should explain the consumer’s rights and responsibilities, the impact of missed payments, and how BNPL differs from traditional credit products.
Regarding incidental and ancillary fees, TILA revisions should require these fees be clearly disclosed upfront, standardized where possible, and included in the total cost disclosure, so consumers understand the real cost of BNPL usage.
As BNPL transactions reach an estimated $100 billion annually, it is essential that Congress modernizes TILA to reflect pay-in-four, pay-in-three, and even pay-in-two models to increase consumer awareness of the total cost of a purchase using BNPL.
Moreover, BNPL providers generally do not report these loans to credit bureaus, which can result in consumers having significant debt in BNPL services without that information being included in their credit report. To address this, Congress should require BNPL services to report consumer loans to credit reporting services to help consumers understand their debt level and increase lending accuracy.
In summary, revising TILA to cover BNPL requires explicit inclusion of BNPL products as credit, introducing specific and standardized disclosure of installment terms and fees, mandating affordability assessments, enforcing transparent fee disclosure, and requiring improved consumer education to foster a better understanding of this new credit form. These changes would increase transparency and promote responsible use of BNPL.
Recent initiatives, such as the Washington state Better Business Bureau's campaign to educate consumers on BNPL services and the potential impact of consumer debt during back-to-school shopping, are steps in the right direction. However, more action is needed to ensure consumers are fully informed and protected when using BNPL services.
[1] Source: Consumer Reports [5] Source: Brookings Institution
- In light of the growing trend of Buy Now, Pay Later (BNPL) services, it's essential to revise the Truth in Lending Act (TILA) to ensure these services are transparent and promote responsible usage, as they currently lack traditional finance charges and do not trigger TILA’s cost-of-credit disclosure requirements.
- To protect consumers from potential over-indebtedness, TILA revisions should mandate affordability assessments like those in conventional lending, and require BNPL services to report consumer loans to credit reporting services to help consumers understand their debt level and increase lending accuracy.
- To promote informed usage of BNPL and ensure consumers are fully protected, TILA revisions should require lenders or BNPL providers to deliver clear, comprehensible educational materials at the point of sale and periodically thereafter, detailing consumers' rights, responsibilities, and the impact of missed payments, among other things.
