OCC offers compliance guidance to banks on ‘buy now, pay later’ loans

The OCC’s bulletin, released Wednesday, addressed risks posed by BNPL loans payable in four or fewer installments and carrying no finance charges. Loans with payment terms greater than four installments or that charge interest or carry other finance charges are considered by the OCC to be traditional and are not within the scope of the guidance.

The agency said BNPL loans are popular with tech-savvy customers and those with little or no credit history and are often associated with online purchases.

Because BNPL loans are short term, some of the bank’s credit management policies should have shortened time frames to determine delinquency. For example, the traditional 30-days-past-due model might be too long for BNPL loans, which might be delinquent if there are problems with the first payment.

Many BNPL loans are arranged by third parties, including nonbank lenders, so banks should be careful to monitor the terms and servicing of the loan arranged by a third party. The automated nature of the BNPL loan approval process also produces unique risks related to establishing credit and for the handling of complaints, disputes, and returns. BNPL loans could be vulnerable to increased risk of fraud, so banks should consider implementing increased fraud monitoring protections, the OCC said.

The agency’s guidance also addressed compliance considerations posed by BNPL loans. Bank management should “give 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,” the guidance said.

Banks should determine which federal consumer and credit reporting laws apply to BNPL loans and ensure the loans comply with all applicable laws.

BNPL lending should be incorporated into a bank’s compliance management system, the OCC advised.