Industry and consumer groups pan Illinois' potential BNPL law

• Key insights: The state's proposed law would mark the second state law governing the buy now/pay later industry. Both consumer advocacy and industry groups say there's still room for improvement. 
• What's at stake: States have taken an increased interest in the up-and-coming BNPL industry as they look to fill the void left by federal regulators. 
• Forward look: The bill, if signed by Governor JB Pritzker, will require BNPL lenders to register with the state's regulator, provide disclosures to consumers and consider the borrower's ability to repay in underwriting decisions. 

Illinois is on its way to become the second state with a law governing the buy now/pay later industry. Both consumer advocacy and industry groups say it needs more work. 

The Buy-Now-Pay-Later Loan Consumer Protection Act, or SB3561, passed both chambers of the Illinois legislature and is slated to be sent to Governor JB Pritzker. If it passes, the legislation will require fintech BNPL lenders to register with the state's regulator, provide disclosure to borrowers, and consider the borrower's ability to repay in underwriting decisions, among others. Merchants and banks are excluded from the bill. 

The law covers closed-end credit provided to a customer at the time of a transaction at the point of sale that is either payable in four or fewer installments or has a term of 120 days or less, according to the legislation. And it is designed to protect consumers from predatory lending, according to Illinois State Senator Michael Hastings, a Democrat, who spearheaded the bill.

"People who are living paycheck-to-paycheck are lured in by these services and can quickly find themselves trapped in debt or facing unexpected penalties," Hastings said in a statement. "It's essentially a loan shark with a new paint job."

While the proposed legislation shares many of the same substantive protections as New York's BNPL law, the Illinois law puts a larger focus on installment loans that are repaid in four, two-week installments, called Pay in 4, according to Susan Seaman, a partner at the law firm Husch Blackwell.

"New York doesn't focus on Pay in 4," Seaman told American Banker. "It's quite broad to include other kinds of point of sale installment financing, including a three year installment loan to pay for furniture."  

The term "Pay in 4" first began as a colloquial marketing term BNPL providers used to describe their short duration loans but has since evolved into a statutory term used to describe financial products that sit outside the bounds of legacy regulation. Pay in 4 loans are usually repaid in four installments over the course of six weeks, putting them outside the scope of the Truth in Lending Act that governs most consumer-facing financial products.  

Consumer advocacy groups have long called for more regulations on BNPL, and states have taken an increased interest amid a wider regulatory pullback from the Consumer Financial Protection Bureau, which under the Biden administration was in the early innings of crafting a BNPL-specific regulatory regime. Last December, seven state attorneys general from Connecticut, North Carolina, California, Colorado, Illinois, Minnesota and Wisconsin requested detailed information from some of the largest BNPL providers about their business practices. 

But Chicago-based consumer advocacy group Woodstock Institute said that the bill weakens oversight of BNPL lenders because it excludes them from critical data reporting requirements and codifies a loophole that allows them to skirt consumer protection measures. 

Specifically, the bill would remove BNPL lenders from the Consumer Installment Loan Act – the state's broad installment and title-loan regulation – and its existing database, which has been used to track predatory lending in Chicago that targeted predominantly Black neighborhoods. 

"Advocates and regulators alike depend on data to identify predatory lending that drains wealth from historically marginalized communities," Woodstock President and CEO Horacio Mendez said in a statement. "At a time when the federal government is abandoning consumer financial protection and fair lending enforcement, it is alarming that the Illinois General Assembly is fast tracking a bill that would remove one of the fastest growing consumer loan products from accountability and oversight." 

Woodstock also took issue with the 120-day term limit.  

"By strictly defining BNPL products as a loan that must be repayable in 120 days or less, this bill makes it easy for lenders to design their products to evade legal oversight by, for example, originating loans that are repayable in 121 days," Woodstock said. Most BNPL lenders, including Affirm and Klarna, offer consumers longer-term, interest-bearing installment loans in addition to their respective Pay in 4 loans. 

But the bill in its current form has strong anti-evasion language that discourages lenders from exploiting any perceived loopholes, Seaman said. 

"Pay in 4 products, historically, is usually a six-week product with four or fewer payments," Seaman said. "If we're focused on Pay in 4, we don't get to 120 days, usually." 

The Financial Technology Association, an industry trade organization that represents BNPL lenders, said the law would "impose duplicative and ill-fitting regulatory requirements" on providers. Specifically, the FTA took issue with included consumer dispute rules, autopay and account debit restrictions, APR-based fee caps, and True Lender provisions included in the bill. 

"FTA's outstanding concerns include application of TILA credit card dispute rights that are ill-fitting for closed-end products, autopay and account debit restrictions that conflict with federal regulations and NACHA standards, an APR-based fee cap that is ill-fitting for closed-end, short-term loans, and provisions that contravene current law relating to bank-fintech partnerships," the FTA said.