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In December 2023, the OCC issued a Bulletin (2023-37), Retail Lending: Risk Management of ‘Buy Now, Pay Later’ Lending. The Bulletin has a key passage applicable to BNPL and easily transcends that payment product: “Comprehensive and consistent credit bureau reporting that complies with the requirements of the Fair Credit Reporting Act and its implementing regulations helps banks manage credit risk and would allow borrowers who make on-time payments to demonstrate positive credit behavior and build credit history.”
The Bulletin notes that
[t]he rapidly growing availability of BNPL loans could pose risks related to consumer credit reporting. BNPL loans may not be fully captured in borrower credit histories. Many BNPL lenders use soft credit bureau inquiries to approve borrowers. Existing credit scoring systems are not designed to capture the very short-term nature and structure of BNPL loans. Incomplete reporting of BNPL loans could make it difficult for lenders to know the total dollar amount of debts and other obligations that applicants have before determining whether to approve them for new credit. The three major credit bureaus announced they would begin including BNPL transactions in their reporting, but it could take some time before BNPL activity is consistently reflected in credit scores.
(citation omitted). Further,
Furnishing comprehensive information to the credit bureaus in a timely manner in compliance with the requirements of the Fair Credit Reporting Act and its implementing regulations would help mitigate credit risk associated with BNPL loans. Industry-wide reporting of BNPL loans would aid banks in identifying an applicant’s total debt obligations when evaluating repayment ability and avoid overextending borrowers through multiple concurrent BNPL loans. Without comprehensive industry-wide reporting, BNPL lenders may not have full visibility into applicants’ activities on other platforms. Furnishing payment information to credit bureaus would also allow borrowers who make on-time payments to demonstrate positive credit behavior and build credit history.
In a footnote, the Bulletin said that “[b]anks should report BNPL loan information to credit bureaus when the credit bureaus have begun accepting this information for reporting.” It added that “[t]he three major credit bureaus announced they would begin including BNPL transactions in their reporting.”
The Bulletin cites as a risk in BNPL is that “[l]enders could have no visibility into an applicant’s borrowing activity on BNPL platforms given limited capture of BNPL activity by credit reporting agencies.”
BNPL can mean a variety of different installment loan products. The Bulletin does not over “[l]oans with payment terms greater than four installments or that charge interest or carry other finance charges are treated as traditional installment loans (a longstanding bank product)…” The Bulletin “provides background information on BNPL loans”, “discusses risks associated with BNPL lending”, and “provides guidance to banks offering or considering offering BNPL loans.”
Summaries
Cooley (Dec. 12, 2023)
BallardSpahr (Dec. 7, 2023)
Troutman (Dec. 7. 2023)