OCC issues guidance on managing risks of Buy Now, Pay Later

WASHINGTON — The Office of the Comptroller of the Currency (OCC) issued a new guidance to banks Wednesday on the prudent management of risks associated with “buy now, pay later” lending, recommending tight oversight of third-party servicers, issuing transparent loan terms and heightened fraud mitigation.

The OCC said banks should be especially wary of BNPL borrowers taking on too much credit, especially considering many BNPL lenders use soft credit bureau inquiries to approve borrowers — though that is beginning to change after the three major credit bureaus announced they would start tracking such transactions last year.

“Existing credit scoring systems are not designed to capture the very short-term nature and structure of BNPL loans,” the guidance noted. “Incomplete reporting of BNPL loans could make it difficult for lenders to know the total dollar amount of debts and other obligations that applicants have before determining whether to approve them for new credit.”

BNPL loans, also known as point-of-sale installment loans, are increasingly popular for online purchases. In a typical BNPL arrangement, a lender pays a merchant for a good or service, while extending a line of credit to the borrower, who repays the full purchase price of the good through installments. 

In light of the frequently automated nature of BNPL external credit approval procedures, the OCC recommends that banks integrate BNPL lending partnerships into their third-party risk management frameworks.

 “The OCC expects a bank to have risk management processes to effectively manage the risks arising from its activities, including from third-party relationships,” the guidance noted. “A bank that partners with a third party, including a merchant, to offer BNPL loans should incorporate that relationship into the bank’s third-party risk management processes.”

To minimize risks, OCC also recommends banks establish policies considering underwriting criteria, associated fees, and repayment assessments to ensure borrowers can repay.

The OCC also encouraged banks to develop processes for handling merchandise returns and merchant disputes in a fair and transparent way as well as the need for banks to confirm the legal age of potential borrowers.

In terms of credit risk management, the OCC advises banks to establish prudent lending policies, including underwriting criteria, methodologies for assessing repayment capacity, and considerations for allowances for credit losses. The guidance underscores the importance of furnishing comprehensive and timely information to credit bureaus to mitigate credit risk.

OCC also wants banks to be privy to operational risks associated with BNPL lending — such as first payment default — and advised banks to have controls in place to mitigate fraud risks and fortify automated models used in the BNPL lending process.

The OCC also emphasized the need for banks to ensure they remain compliant when lending with BNPL, including by clearly disclosing the borrower’s obligations and any associated fees, as well as adherence to consumer protection laws and regulations. 

“Bank management should determine the applicability of consumer protection-related laws and regulations to the bank’s specific BNPL offerings,” the guidance noted. “Examples of laws and regulations that may apply include the Equal Credit Opportunity Act (ECOA) and Regulation B; Electronic Fund Transfer Act (EFTA) and Regulation E; Fair Credit Reporting Act (FCRA) and Regulation V; section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts and practices; and section 1036 of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive, or abusive acts and practices.”