United States: Unpacking New York&'s Proposed Legislation To Regulate Buy Now Pay Later

On January 17, New York Governor Kathy Hochul proposed legislation to regulate buy now pay later (BNPL) products. Governor Hochul previewed the proposal in early January, which is intended to "ensure fairness" and establish "strong industry protections" in BNPL services.

New York's proposed legislation reflects the latest in regulators' growing interest in regulating the BNPL industry. It comes on the heels of the OCC's December 2023 bulletin and the CFPB's September 2022 BNPL report, both of which cited concerns regarding the lack of consistent consumer protections in this area. New York's proposed legislation addresses several risk areas cited by the OCC and the CFPB, including a consumer's ability to repay, merchandise returns, merchant disputes, credit reporting, and the lack of clear loan disclosures.

Who the Legislation Affects

Coverage

The legislation generally affects a "buy-now-pay-later lender," defined as a person who offers "buy-now-pay-later loans" to New York residents in the state of New York by (i) "extending credit directly to a consumer" and/or (ii) "operating a platform, software or system with which a consumer interacts and the primary purpose of which is to allow third parties to offer buy-now-pay-later loans." A BNPL loan is commonly understood to be a loan that is payable in four or fewer installments and carries no finance charges. Still, the legislation goes far beyond that. It defines a "buy-now-pay-later loan" very broadly as "credit provided to a consumer in connection with such consumer's particular purchase of goods and/or services, other than a motor vehicle." As drafted, the proposal appears to capture all forms of point-of-sale financing, including, arguably, credit cards.

Exclusions

The legislation does not apply to seller-creditors or a person who engages in "isolated, incidental, or occasional" BNPL transactions.

Key Takeaways

1. Licensing Requirement and Exemptions

The legislation requires a license to act as a buy-now-pay-later lender. The following entities are exempt from the licensing requirement but not from the act itself: national banks, NY-chartered banks, federal savings banks, federal savings and loan associations, and federal credit unions. Notably, the legislation does not exempt out-of-state, state-chartered banks from the licensing requirement. Any BNPL loan made by an unlicensed person, except an exempt entity, is void.

2. Limitations on BNPL Charges and Fees

The legislation prohibits a buy-now-pay-later lender from charging, contracting for, or receiving any interest, discount, or consideration greater than 16% per year. Additionally, the proposal generally prohibits a lender from charging "an unfair, abusive, or excessive penalty or fee" in connection with a BNPL loan.

3. Required Disclosures

The legislation requires clear and conspicuous disclosure of the terms of the BNPL loan, including interest and fees, the repayment schedule, and "other material conditions."

4. Ability to Repay Requirement

A buy-now-pay-later lender is required to make a "reasonable determination" that the consumer has the ability to repay the BNPL loan before the loan is provided. Details regarding how the ability to repay analysis must be conducted will be promulgated by the New York Department of Financial Services (NYDFS) in subsequent regulations.

5. Credit Reporting Policies and Procedures

A buy-now-pay-later lender must maintain policies and procedures "for maintaining accurate data that may be reported to credit reporting agencies." However, the proposal is silent on whether credit reporting is actually required and, if so, how consumer reporting agencies must reflect that data. Instead, the proposal provides that the NYDFS "may issue" regulations either requiring or prohibiting credit reporting.

6. Returns, Refunds, and Credits

The legislation requires a buy-now-pay-later lender to maintain policies and procedures for handling returns, refunds, and credits for goods or services purchased with a BNPL loan. It also establishes that the process for returning and obtaining refunds or credits be clearly and conspicuously disclosed to consumers. The process must be "fair, transparent, and not unduly burdensome to consumers."

7. Disputes; Unauthorized Use

A buy-now-pay-later lender must maintain policies and procedures for handling consumer disputes. The method for consumers to submit a dispute to the lender also must be "readily available and prominently disclosed." The proposal also provides that the NYDFS "may issue" regulations concerning unauthorized use, ensuring consumers are held liable for the use of BNPL loans "only under circumstances where such liability would be fair and reasonable."

8. Use of Consumer Data

When a buy-now-pay-later lender makes a BNPL loan to a consumer, the legislation requires the lender to (i) clearly and conspicuously disclose how the consumer's data may be used and (ii) provide the consumer the opportunity to provide or withdraw consent to such use. The proposal leaves it to the NYDFS to propose regulations to prohibit certain uses of consumer data "at their discretion."

Conclusion

As proposed, and if passed, New York's legislation would have a far-reaching impact on various forms of point-of-sale financing, including BNPL products and potentially even credit card transactions. The operational and regulatory burden associated with compliance could change the BNPL market in New York, especially for smaller players in the industry. It remains to be seen whether other states will follow New York's lead, or whether the CFPB will issue its own interpretive guidance or rules to regulate BNPL services.

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