Update 817 — Perils of Short-Term Loans:
CFPB Issues Guidance to Protect Borrowers
You don’t need to be struggling to financially recover from a disaster or unexpected accident to find yourself considering the increasingly available financial products offered to the tens of millions of Americans seeking credit to get by. But these products come at a price that can exceed their face-value cost and set you back by considerably more than you expect.
The Consumer Financial Protection Bureau (CFPB) has been at work finalizing regulations to protect against abuses of borrowers resorting to Earned Wage Access (EWA) advances on their paychecks or Buy Now Pay Later (BNPL) products. Today, we examine abuses by lenders and CFPB efforts to regulate products with hidden costs and other perils to consumers.
Best,
Dana
Many Americans struggle to meet their financial obligations and cover unexpected expenses. Almost 40 percent of American families have trouble paying their bills or expenses and about 30 percent have $500 or less in a checking or savings account. At the same time, access to affordable credit remains difficult for many, particularly low-income Americans.
As consumers seek to get by, financial products providing short-term loans have become more prolific. Although these products are often marketed as promoting financial inclusion, in reality, they can more closely resemble existing forms of short-term credit like payday loans. This summer, the Consumer Financial Protection Bureau (CFPB) released guidance to protect consumers from two types of products that largely target the most financially vulnerable – buy now, pay later (BNPL) products and worker payday loans, commonly marketed as earned wage access (EWA) or paycheck advance products. The guidance clarifies that emerging BNPL and so-called EWA products are covered by existing consumer protection law.
CFPB Clarifies: BNPL Products are Consumer Loans
BNPL is a short-term credit option for retail purchases offered by retailers through payment platforms – apps like Affirm, Afterpay and Klarna. Lenders that issue loan products marketed as BNPL often issue digital user accounts that consumers use to obtain access to credit. Through these BNPL providers, consumers can make online or in-store purchases and repay only their purchase amount, typically in four installments over six weeks. Consumers do not pay any interest as long as they make their payments on time. But the products are evolving and some have monthly subscription fees, different payment schedules, or interest.
As the CFPB found, when consumers purchase goods and services online or in-store, BNPL is frequently offered as an option alongside the option to pay with a credit card. Additionally, consumers often use BNPL credit as a close substitute for conventional credit cards.
The BNPL market is large and has been expanding over recent years. In December 2021, a total of 8.42 million Americans used BNPL products, an all-time high. From 2021 to 2023, the percentage of consumers who had heard about BNPL credit increased from about half to over three quarters. In December 2021, downloads of BNPL apps Affirm, Afterpay, Klarna and Zip (formerly Quadpay) in the United States rose to 3.47 million. Last year, almost ten percent of consumers used BNPL credit.
BNPL Awareness and Use by Year (2021-2023)
Source: Federal Reserve Bank of Boston
Consumers are often uncertain about whether they can get a refund on the products and services they purchase through BNPL credit when they seek to return them, or whether BNPL lenders will help them if they don’t receive the goods or services they were promised. In fact, the CFPB found that over 13 percent of BNPL transactions involved a return or dispute and in 2021, consumers disputed or returned $1.8 billion in transactions involving Affirm, Afterpay, Klarna, PayPal, and Zip.
On May 22, the CFPB issued an interpretive rule confirming that, for certain purposes, BNPL lenders are classified as credit card issuers, and therefore consumers are entitled to some of the same protections, whether they receive credit through BNPL products or credit cards. Specifically, the Bureau clarified that BNPL lenders meet the criteria for credit card providers covered by various provisions under the Truth in Lending Act (TILA).
The Bureau clarified that consumers have a right to dispute charges and BNPL lenders must investigate those disputes, during which time lenders must pause payment requirements, and at times must return payments. Under the rule, as with traditional credit cards, consumers can also demand refunds after returning products or canceling services purchased with a BNPL loan and lenders must credit the refunds to consumers’ accounts. Lastly, under the interpretive rule, BNPL lenders must provide consumers with account disclosures upon its opening and with periodic billing statements thereafter.
Per the CFPB, any non-upfront payments required through BNPL products are a form of credit, and, therefore, BNPL products should be regulated as such. That’s why in 2022, 20/20 Vision joined over 70 other consumer advocacy organizations, including the National Consumer Law Center, to urge the Bureau to view these products as credit cards.
Though the guidance provides important clarity to protect consumers, the CFPB has not extended to BNPL all of the protections that other credit cards receive, such as a requirement to consider the ability to repay and to limit penalty fees to a reasonable and proportional amount.
CFPB Clarifies: “EWA” Products are Consumer Loans
Companies providing worker payday loans – commonly referred to somewhat misleadingly as earned wage access (EWA) products – claim to allow consumers access to the pay that they’ve already earned before their next paycheck. But in reality, these products function as short-term small-dollar loans and pose many of the same issues as existing short-term small-dollar consumer credit products. These products can be provided through employer partnerships in which EWA companies contract with employers who in turn offer these products to their employees as a benefit or be marketed directly to borrowers, eliminating the employer from transactions.
The worst versions of these products can resemble predatory payday loans. Accessing worker payday loans can involve expensive fees resulting in average APRs of over 300 percent. Additionally, workers who access earned wage products often do so over and over as they become trapped in a cycle of debt. The CFPB has found that workers using employer-sponsored products take out an average of 27 such loans per year.
The market for so-called EWA products is also growing quickly. In 2022, over seven million workers accessed approximately $22 billion through employer-partnered earned wage products, with the number of transactions processed by providers of such products increasing by 90 percent from 2021 to 2022 alone.
On July 18, the CFPB proposed an interpretive rule clarifying that worker payday advance loans are consumer loans subject to TILA. The proposed interpretive rule also makes clear that many costs consumers face when accessing so-called paycheck advance products – such as “tips” and fees for expedited delivery – meet the standard under TILA for being finance charges.
Additionally, the CFPB’s proposed guidance clarifies that lenders providing these products must provide workers with appropriate disclosures about the finance charges to allow borrowers the ability to understand and compare loan options. The CFPB notes that allowing easy comparison through such disclosures will sharpen competition and ultimately benefit companies offering the most competitive products. The comment period on the proposed interpretive rule closed at the end of August.
The CFPB’s guidance came months after Representative Bryan Steil (R-WI) introduced a dangerous bill – H.R.7428, the “Earned Wage Access Consumer Protection Act” – to exempt worker payday loan products from basic and much-needed disclosure requirements under TILA. Republicans pushed the bill through committee at a House Committee on Financial Services markup in April. Less disclosure is exactly the opposite of what is needed. As such, 20/20 Vision strongly opposes the bill.
Conclusion
While BNPL and worker payday advance loans may be marketed as innovative solutions that help consumers, they are repackaged versions of small-dollar loans that have long existed. Thus, providers of BNPL and so-called EWA products should provide consumers the same protections as providers of traditional credit products. The CFPB’s guidance takes strong steps toward protecting the most financially vulnerable consumers.