New York's BNPL regs take shape amid a CFPB vacuum

• Key insights: New York state is working on tougher regulations for buy now/pay later lending.
• What's at stake: The move comes as the Consumer Financial Protection Bureau retreats from regulating the credit option.
• Forward look: Other states are expected to follow New York's lead. 

The Consumer Financial Protection Bureau's pullback from buy now/pay later enforcement has opened doors for more state regulation. 
New York has taken the lead with legislation that provides for the licensing of BNPL lenders and establishes protections for consumers using BNPL loans. Recently, the National Consumer Law Center published an issue brief highlighting how other states can adapt and build on New York's act to strengthen protections for borrowers in their states. 

New York Governor Kathy Hochul on Monday announced the proposed rules. "Too many New Yorkers have learned the hard way that some 'Buy Now, Pay Later' products are designed to trip them up with junk fees and overly burdensome fine print instead of helping them build a stable financial future," Hochul said in a release.  "These new nation-leading regulations ensure that lenders know we have clear disclosures, limits on fees and real oversight so families don't get pushed into a debt spiral while big financial companies cash in."

The CFPB's about-face on its 2024-issued rule that would have treated BNPL products like credit cards "creates a perfect storm for a flood of state-level regulation," Eric Grover, principal at Intrepid Ventures, a corporate development and strategy consultancy, wrote in an email to American Banker. 

"Many Democratic states are chomping at the bit to step into the void the CFPB has left. New York was first. I expect California, Illinois, and Massachusetts will swiftly follow suit, with more 'blue' states to follow, maybe New Jersey, Connecticut, Maryland [and others] likely to join the stampede. In contrast, 'red' states are likely to use existing statutes to police bad actors," he wrote. 

New York's impact

New York has budgeted funds to develop rules for BNPL and industry participants were expecting a proposal imminently. "We've had numerous conversations with DFS since the legislation has passed and believe we're going to see a draft of the regulations any week now," Phil Goldfeder, chief executive of the American Fintech Council, told American Banker, last week.

An initial comment period for the draft rules ends March 5. The rules would still need to be published in the State Register for a formal comment period, and the public will have 60 days to comment. Once the comment period is complete, DFS will review the comments and may amend the proposal in response or adopt the regulation. The buy now/pay later act would become effective 180 days after the regulation is adopted.

Other states are likely waiting on the sidelines as the New York regulations progress. Several states, however, are at least ruminating on the issue. Deborah Baxley, partner at payments advisory firm PayGility Advisors and a U.S. Payments Forum Steering Committee member, points to a recent move by a coalition of seven attorneys general seeking data from BNPL lenders. In a letter to the country's largest BNPL companies, the states' attorneys general asked detailed questions about the lenders' business practices and expressed concern that, amid a federal regulator pullback, BNPL customers may not be given the same rights as credit card users.

"We are concerned that BNPL companies might not be providing their customers with appropriate protections when they return their purchase, never receive what they ordered, or experience other billing errors," wrote the AGs of Connecticut, North Carolina, California, Colorado, Illinois, Minnesota and Wisconsin.

Faced with the prospect of having to comply with a patchwork of state regulations, BNPL providers are now loudly calling for Congress to pass a BNPL bill, Grover noted. Alternatively, some BNPL companies are partnering with banks to avoid a multitude of state-specific regulations. "Clear, light rules with vigorous enforcement are good for consumers and good for the BNPL industry," he wrote. "Consumers ultimately will bear the cost if BNPL providers have to comply with a couple dozen different BNPL state regulations."

To be sure, an assortment of differing state laws could create complications for providers, similar to what's happening in the earned wage access space. "I think the NY law is the inevitable result of the neutering of the CFPB — states go their own way, creating headaches for the fintech providers," Aaron McPherson, principal of AFM Consulting, wrote in an email to American Banker.

The debate

Indeed, several market players don't see the need for additional state regulation of BNPL. The Financial Technology Association contends that key consumer protection laws at the state and federal levels already exist. These protections cover anti-money laundering, fair lending, debt collection, privacy, fair treatment of customers and electronic fund transfers, according to the FTA. Additionally, many pay-in-four BNPLs are issued through bank partnerships and are therefore subject to the same requirements as any bank loan, the organization contends. 

"BNPL is a valued financial tool for millions of Americans, helping them split the cost of a purchase into four easy installments with no interest, no revolving balances, and no fees when repaid on time," Miranda Margowsky, head of communications, wrote in an email to American Banker. "People are using BNPL responsibly, with 96% of purchases repaid in full and on time," she wrote.

As BNPL becomes a more popular payment method, some states have been cracking down on providers through enforcement actions. In May 2024, for example, the Maryland Department of Labor's Office of Financial Regulation settled with BNPL company Four Technologies for violations of Maryland lending law. The company agreed to pay $45,000 in civil penalties and refund more than $184,000 to 2,467 impacted Maryland consumers.

In California, the Department of Financial Protection and Innovation oversees BNPL providers through licensing, examinations and enforcement. DFPI has also issued alerts and guidance to educate consumers on the risks of these products. "We take this responsibility seriously," a spokesperson wrote in an email to American Banker.

Additionally, DFPI has taken enforcement action against unlicensed BNPL lenders. In 2020, several major BNPL companies agreed to cease unlicensed lending and pay nearly $2 million in refunds and $200,000 in penalties. 

Meanwhile, regulators outside the U.S. are also circling the wagons. A spokesperson for Capgemini pointed to a recent development in the U.K. in which the Financial Conduct Authority mandated that BNPL providers will come under full regulation starting this summer. Under the new rules, lenders must provide clear, upfront information on repayment schedules and charges, conduct proportionate affordability checks before each loan, and offer support to customers facing financial difficulty.