On December 6, 2023, the OCC issued guidance to national banks and federal savings associations to address the risks associated with “buy now, pay later” lending. The guidance focuses on the risk management of buy now, pay later (BNPL) loans and notes that banks should maintain underwriting, repayment terms, pricing, and safeguards that minimize adverse customer outcomes. Banks also should ensure that marketing materials and disclosures are clear and conspicuous.
"Buy now, pay later" is widely used to describe various types of installment lending products. The OCC’s bulletin addresses BNPL loans that are payable in four or fewer installments and carry no finance charges. BNPL loans are also referred to as "point-of-sale installment loans" or "pay-in-4" loans. BNPL loans carry risks to banks and consumers which include the following:
Borrowers could overextend themselves or may not fully understand BNPL loan repayment obligations.
BNPL applicants might have limited or no credit history, which could present underwriting challenges to banks.
The lack of clear, standardized disclosure language could obscure the true nature of the loan, result in consumer harm, or present potential risks of violating prohibitions on unfair, deceptive, or abusive acts or practices.
Merchandise returns and merchant disputes can be problematic for BNPL borrowers and banks because the issue may not be resolved during the brief term of the loan.
Third-party relationships may increase a bank's exposure to operational and compliance risks because the bank may not have direct control of the activity performed by the third party.
The highly automated nature of BNPL lending, with instantaneous credit decisioning and frequent strong reliance on third parties, may present elevated operational risk, including fraud risk.
BNPL structures may present elevated first payment default risk from fraud or borrower oversight. With loan payments typically tied to a debit or credit card, overextension can also result in secondary fees charged to the borrower, such as overdraft, non-sufficient funds, and late fees.
Lenders could have no visibility into an applicant's borrowing activity on BNPL platforms given limited capture of BNPL activity by credit reporting agencies.
The OCC’s bulletin reminds banks offering BNPL loans to do so in a manner that is safe and sound, provides fair access to financial services, supports fair treatment of consumers, and complies with applicable laws and regulations. Risk mitigation practices include the following:
Establishing 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;
Furnishing comprehensive information to the credit bureaus in a timely manner in compliance with the requirements of the FCRA;
Assessing fraud risk and implementing controls to mitigate those risks;
Models used in the BNPL lending process should be subject to sound model risk management and incorporated into a bank's model risk management processes;
Incorporating third party partnerships into the bank's third-party risk management processes; and
Giving close attention to the delivery method, timing, and appropriateness of marketing, advertising, and consumer disclosures to ensure that they all clearly state the borrower's obligations under the contract and clearly state any fees that may apply.
Read OCC’s press release here.
The OCC Bulletin 2023-37 can be found here.