NYDFS Proposes Licensing and Regulatory Framework for Buy-Now-Pay-Later Lenders
Commentary by Steven Lofchie
The New York State Department of Financial Services ("NYDFS") proposed a rule that would require buy-now-pay-later ("BNPL") lenders operating in the state to obtain a license or authorization and comply with new consumer protection, underwriting, and reporting standards.
The proposal would establish a comprehensive regulatory regime for BNPL loans, which it defines as closed-end credit provided to a consumer in connection with a particular purchase of goods or services, excluding credit for motor vehicles, most credit extended directly by the seller, purchase-money mortgages, and credit for non-personal use. The rule would require BNPL lenders that are not exempt organizations to obtain either a license or, for entities already regulated under the Banking Law, a written authorization from the Superintendent, plus category permission to offer interest-free loans, interest-bearing loans, or both. Lenders would also be subject to capital and bonding requirements to ensure financial solvency.
The proposal would mandate clear pre-transaction and post-transaction disclosures, periodic statements, and reasonable risk-based underwriting that assesses a consumer's income and indebtedness. It would also establish procedures for refunds, credits, and dispute resolution.
The rule would cap penalty fees for violating a loan agreement at $8, unless the lender justifies a higher fee based on a cost analysis approved by the Superintendent. It would also prohibit charging multiple fees for a single event and cap cumulative penalty fees at the original amount financed.
Except with the consumer's affirmative, informed consent, lenders would be prohibited from using, selling, or sharing a consumer's non-public data for any purpose other than making the loan.
The rule would take effect 180 days after publication of a Notice of Adoption in the State Register. Lenders already operating would have 45 days from that date to apply for a license or category permission, and would operate provisionally while their applications are pending. The comment deadline will be set upon publication in the State Register.
Commentary
While measures like this have a feel-good, protect-the-little-guy sound about them, it is not obvious that their ultimate result is anything other than limiting lending to low-income borrowers. One could feel more comfortable with the rule if it were tied to some empirical study of the results: Do lenders stop making loans? Are potential borrowers injured?
As for the provision that lenders can apply to the Superintendent for permission to charge higher penalty fees, good luck with that. What evidence would be required? How quickly would the Superintendent act? How high would the cap on penalty fees be raised? If there were a prediction market on the outcome, I would bet that no waivers would be issued, except perhaps on the basis of inflation.