Episode 4: Comply Now, Don’t Pay Later

Episode Description:

Today’s COMPLY Podcast is a discussion had between John Zanzarella, VP of Sales here at PerformLine and Eamonn Moran, Of Counsel at Morgan, Lewis & Bockius LLP.  Their conversation revolves around the implications of the CFPB’s recent probe into five major BNPL providers—which was announced last December and was due on March 1st of this year—over concerns about risks to consumers associated with accumulating debt, regulatory arbitrage, credit reporting, and data harvesting.

As well as what compliance or legal teams at buy now, pay later companies can proactively put in place today to adhere to existing regulations for consumer finance products including UDAAP and TILA.

Show Notes:

• Consumer Complaint Trends for the BNPL Industry: https://bit.ly/3Mat4Ql
• International Regulation Map for Buy Now, Pay Later Lenders: https://bit.ly/3MfqPva
• The Buy Now, Pay Later Compliance Checklist: https://bit.ly/3ah4XCp
• Follow John: https://www.linkedin.com/in/johnzanzarella/
• Follow Eamonn: https://www.linkedin.com/in/eamonnkmoran/

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About COMPLY: The Marketing Compliance Podcast

The state of marketing compliance and regulation is evolving faster than ever, especially for those in the consumer finance space. On the COMPLY podcast, we sit down with the biggest names in marketing, compliance, regulations, and innovation as they share their playbooks to help you take your compliance practice to the next level. 

Episode Transcript:

Ashley:
Hello, and welcome back to a new episode of the COMPLY podcast. Today’s podcast is a discussion between Johns Zanzarella, VP of Sales here at PerformLine, and Eamonn Moran, Of Counsel at Morgan, Lewis & Bockius LLP. Their conversation revolves around the implications of the CFPB’s recent probe into five major Buy Now, Pay Later providers, which was announced last December and was due in March first of this year, over concerns about the risk to consumers associated with accumulating debt, regulatory arbitrage, credit reporting, and data harvesting. As well as what compliance or legal teams at Buy Now, Pay Later companies can proactively put in place today to adhere to existing regulations for consumer finance products, including UDAAP and TILA. As always thanks for tuning in and enjoy the show!

John:
It is my pleasure to introduce our guest speaker today, Eamonn Moran, Of Counsel at Morgan, Lewis & Bockius LLP, where he regularly handles matters in the financial services industry, including those pertaining to consumer financial services, consumer protection, fair lending, the Dodd-Frank ACT, regulatory compliance, and the CFPB where he previously served as counsel in the Office of Regulations. Eamonn helps lenders, FinTech, RegTech companies, marketplace lending platforms, payments companies, and of course Buy Now, Pay Later companies navigate issues arising under state and federal service laws. Eamonn serves on the firm’s FinTech, banking, and automotive and mobility industry teams, and as a co-leader of the banking industry teams, lender issues working group. Eamonn, thanks so much for joining us today. Eamonn a good place to start is, is just discussing the implications of the CFPB’s probe into the five major Buy Now, Pay Later providers, so that was announced last December. It was due on March 1st. It was, you know, really conceived around concerns about risk to consumers associated with accumulating debt, regulatory arbitrage, credit reporting, and data harvesting. Based on the findings of this probe, what do you see, in your opinion, are the future implications for buy now, pay later providers?

Eamonn:
Sure. Thanks, John. First off, I would just say that it’s very early in the process here. So we’re still in the month of March, the actual, the public comment period on BNPL which the CFPB launched after the inquiry with the first five companies, the BNPL providers, the comment period on that actually closes later this week. So we are still sort of at least in the information and collection stage, none of us has a crystal ball, unfortunately telling us what actions of anything the CFPB or other regulators will really take as a result of this particular inquiry. That said, I think it’s critical for everybody to focus on the key areas of concern as well as other issues of potential consumer harm, but in particular, the issues that the CFPB highlighted in its inquiry. So first being debt accumulation, I think there’s a general concern that BNPL products do allow a customer consumer to have multiple purchases on multiple schedules with multiple companies.

Eamonn:
Again, depending upon who the consumer actually is using for the B NPL products, whether it’s one company or any number of companies for different purchases. So this may mean that it may be hard for a consumer to keep track of when the various payments are scheduled and going to hit his or her bank account. And when there’s not enough money in a consumers bank account, you know, this can potentially result in charges by both the consumers bank for example, overdraft or NSF charges, as well as from the BNPL provider, if money is not there, when the effort is made to, to take the money in which, from the consumers account, when it comes time to payment and because of ease of getting these loans, consumers can up spending more than anticipated. So I think the first piece is just, you know, what’s out there in terms of the debt accumulation piece.

Eamonn:
What are the different practices amongst BNPL providers with respect to managing the number of transactions, especially with respect to each individual user, whether it’s concurrent transactions from the same provider, whether it’s consecutive BNPL purchases from the same provider, etcetera. The second main issue that the CFPB flagged was regulatory arbitrage. So this really gets into whether BNPL providers are adequately evaluating what consumer protection laws apply to their products. So for example, some BNPL products do not provide certain disclosures, which may be required by some laws. And while the BNPL application process may look similar to a standard checkout with a credit card, protections that apply at least certain protections that apply to credit cards may not apply to the BNPL products. And here I’m looking at specifically dispute resolution protections, which are available to users of other forms of consumer credit, like credit cards, and the practices with respect to dispute resolution.

Eamonn:
What happens if the consumer returns a product, sort of when is the refund process, etcetera, how long of a time lag is there between return and sort of managing that these are sort of hard and parcel of, of some of the issues here that fall into the regulatory. And then I think the third one, which is really an interesting one, goes at the data harvesting issue that the CFPB collect, obviously we’re in an age where there’s a lot of focus on privacy and data security. What information is actually being collected, from consumers and sort of BNPL providers have access to the valuable payment histories of their customers. And so some have used this collected data to create closed loop shopping apps with partner merchants, pushing specific brands and products often geared toward younger audiences, since younger generations, seemingly are, are those amongst that population that has found this particular product and service to be particularly valuable.

Eamonn:
And as competitive forces come out and pressure the merchant pricing and fees structure, potentially the BNPL providers will need to find other sources of revenue to maintain growth and profitability. So the key areas here are really practices around data collection, behavioral targeting, data monetization, and the risks that all of these pieces may create for consumers. So I think at a high level, the speed at which the industry, the BNPL industry is evolving, could prompt the CFPB to act, you know, more quickly once these deadlines for, for both from the company, which passed on March 1st, as well as the consumer comment period, which ends, it’s on March 25th, which is the end of this week. You know, could obviously mean that whatever the actions the Bureau comes out with might be done at some point later this year, hard to really pinpoint the time period.

Eamonn:
But I would say the CFPB director Rohit Chopra, who was just recently installed in October, had an appearance on CNBC recently. And he noted that because the BNPL industry has generated huge growth recently, that his agency is exploring, you know, to see if there are any regulatory gaps. And he did note that the Bureau plans to issue a set of reports to say what the agency might do and where it can make sure that BNPL is safe for consumers and families. So again, it’s plans for the BNPL space remain unclear at this early stage, but I do think that we have certain indications from the agency about where the Bureau might be focusing its efforts on. And I think there’s probably a consensus at least, you know, amongst some in the industry that additional guardrails and protections may be applied here.

John:
Thanks, Eamonn, and I do wanna dive into a couple of things you said there. So I think the first one, which was your second bullet point was around regulatory arbitrage, and you describe it as the adequate evaluation of consumer protection laws. So is it safe to say for, individuals who may be on the compliance or legal side of a Buy Now, Pay Later company, they should be already putting controls in place to adhere to at least some of the ones that we see across, consumer finance products, like UDAAP, Truth in Lending. Are there any other things that you would recommend companies be focusing on even before the official regulations come out from the CFPB?

Eamonn:
Sure, so I do think that, you know, one of the key areas here is, is whether, you know, the product actually qualifies as credit. For example, that would be subject to federal and state laws that do apply to consumer credit, right. Or if it’s a payment product. And so I think there’s a distinction there at play where each product is somewhat different, different providers in this space, you know, structure their products, for example, potentially to not be subject to the Truth in Lending Act, if it doesn’t qualify and it doesn’t fall within the scope, for example you know, the pay in four model is seemingly popular just because of the potential leverage that provides to not technically fall within the Truth in Lending Act. You know, it’s not entirely a space, but just for, to be clear, it’s not entirely a space where there’s absolutely no regulation at all.

Eamonn:
And so even though it’s a newer product, there’s innovation still taking place within the industry. It’s important just to remember that BNPL providers are already subject to certain federal and state laws that address fair lending, credit reporting, consumer privacy, information security, and the prevention of money laundering, for example, right? So on the federal side, there’s an array of existing laws, that it may apply to BNPL products and services ranging from credit reporting and data privacy laws to traditional UDAAP. Obviously, the UDAAP one UDAP with the single A as well as UDAP with the double A, depending upon which regulator we’re talking about, you know, that’s a main one that’s always important because that obviously is broadly applied and applicable to everything from consumer advertising, to marketing, to communications with consumers, to information that’s being provided and disclosed, to making sure that there’s no deception going on, right.

Eamonn:
That advertising is actually accurate, that there’s no sort of hidden fees and fine print etcetera that potentially could cause consumer risk. So certainly UDAAP, I would put on the list of items, that is really important in this space. You know, beyond that, you know, it’s really kind of product-specific, but BNPL offerings may subject anti-information provisions, that fall within the Equal Credit Opportunity Act. So the Fair Lending piece here, regardless of whether the product actually is structured or not to fall within scope of TILA and Regulation Z, the definition of credit within the fair lending laws is actually broader than that. So even though you may not, the product may not fall scope of TILA of coverage. It may still fall unlikely will, will still fall within the fair lending, bucket consideration to the extent that the BNPL entity is consulting with credit reporting bureaus to check the credit of their borrowers.

Eamonn:
As part of the process, the consumer protections of the Fair Credit Reporting Act would come into play. If the provider is offering open-ended credit, that may be subject to the Truth and Lending Act, as well as the Military Lending Act, which do impose rules on account opening, advertising fee, disclosures, resolving credit, billing errors, and other requirements. If you’re receiving non-public personal information from the financial institution, that’s subject to the Gramm-Leach-Bliley Act provisions designed to protect and safeguard consumer financial privacy. And of course, you know, enforcement actions could be brought under any, any number of these statutes. I sort of listed a few of those, you know, obviously we’re probably also in the space of, you know, what happens if the consumer decides, or there is an issue going on with the payment collection process, or is a BNPL provider in the vet collection space, how are they interacting with consumers?

Eamonn:
Does the Telephone Consumer Protection Act apply, is the BNPL provider, making phone calls, providing text messages to them? You know, these are sort of any number of issues that potentially could go on. And of course you still have, if you’re taking automatic payments from a consumer, as part of the repayment plan the electronic fund transfer act would apply in terms of direct automatic payments. Rather than, you know, obviously accepting a check for example, or a payment over the phone on a credit card. So CFPB has brought authority to bring enforcement actions against UDAAPs in the industry. The Federal Trade Comission also has jurisdiction over BNPL entities. Between these two regulatory agencies, potentially they could target among other aspects, deceptive advertising practices. Also keep in mind that depending upon the product structure, that particular BNPL products could be subject to the Republican scope of the CFPB’s pending payday lending rule.

Eamonn:
Again, that’s definition specific, so we’d wanna kind double-check to see, you know, where the products might fall and sort of which consumer financial services laws may at play here. And again I’ll also flag that of course states also have regulatory powers. So while existing state laws are not necessarily written to apply specifically to the BNPL companies, the BNPL companies may fall under state licensing regimes for lenders and be subject to state laws prohibiting UDAAP, I’ll flag the California Department of Financial Protection and Innovation as one example of a state that taken a more aggressive view of whether BNPL products, at least the entities that it has reviewed would need a consumer lending license to provide the services that it does provide. And so there were enforcement actions in 2020 in California involving several BNPL providers.

Eamonn:
I think several of them are represented in this session, so I won’t name them for providing services without a license. And so those companies had to pay modest civil penalties but were also ordered to refund credit fees, paid to them by California residents and prohibited from providing loans or extensions of credit except pursuant to this particular state license. So I guess sort of at, at a high level, there’s any number of potential laws and regulations that could be at play, I would say it’s good to sort of, you know, keep solid grounding and sort of what a good compliance management program looks like to make sure that your company is working, with good legal counsel to ensure that whatever the particular product offering that it is in the BNPL space that your company is providing, is obviously checking the boxes in terms of compliance for any number of these items that, that we’ve sort of discussed here even, even very briefly.

Eamonn:
So, there’s any number of, you know, things in terms of, you know, policies and procedures that could be drafted to structure or product and program that’s protection, laws and regulatory standards. Making sure that if there’s state lending and licensing requirements, that you’re checking the box with respect back. What about contracts and negotiations with partners to fund provide and market BNPL offerings to consumers? How, how exactly is the funds flow structured? What are the credit terms do, we need to sort of reassess the consumer facingconsumer-facingterms and conditions for retailers, financial institutions, the BNPL providers, what about marketing activities? What’s the enrollment flow process, are there customer service issues with respect to cancellation refunds, etcetera. And of course you have more tech-focused issues such as what are the software and intellectual property licensing agreements for BNPL technology, as well as sort of brand protection efforts for new products and services? So I do think that, you know, this space is gonna continue to receive significant attention from lawmakers and regulators in the year ahead. So careful planning on any number of these fronts may help promote stable growth as well as enhance the benefits.

Ashley:
Thanks for listening to this episode of the COMPLY podcast. We hope you enjoyed the conversations between John and Eamonn around impending regulation for the Buy Now, Pay Later industry and what compliance and legal teams can implement today to adhere to existing consumer finance regulations. For additional insights into all things marketing compliance, you can head to performline.com/resources and be sure to check out the links and resources in today’s show notes. Thanks again for listening, and we’ll see you next time.