The Office of the Comptroller of the Currency (OCC) has released new guidance for banks on managing the risks associated with buy now, pay later (BNPL) lending. The OCC’s recommendations include tight oversight of third-party servicers, transparent loan terms, and increased fraud prevention measures.
One of the key concerns highlighted by the OCC is the potential for BNPL borrowers to accumulate too much credit. Many BNPL lenders rely on soft credit bureau inquiries for borrower approvals, which can lead to incomplete reporting of loans. This makes it challenging for lenders to accurately assess borrowers’ overall debt and obligations before extending new credit.
BNPL loans, also known as point-of-sale installment loans, have become increasingly popular for online purchases. In this type of lending arrangement, a lender pays a merchant for a product or service while providing the borrower with a line of credit to repay the purchase price through installments.
Given the automated nature of BNPL external credit approval processes, the OCC advises banks to integrate BNPL lending partnerships into their third-party risk management frameworks. This integration will help minimize risks associated with BNPL lending.
To mitigate risks, the OCC recommends that banks establish policies for underwriting criteria, fees, and repayment assessments to ensure borrowers have the capacity to repay. Additionally, banks should develop fair and transparent processes for handling merchandise returns and merchant disputes. It is also crucial for banks to verify the legal age of potential borrowers.
Credit risk management is another area of focus outlined by the OCC. Banks are advised to establish prudent lending policies, including underwriting criteria and repayment capacity assessments. Furnishing comprehensive and timely information to credit bureaus is emphasized as a means to mitigate credit risk.
Operational risks associated with BNPL lending, such as first payment defaults, should be considered by banks. The OCC recommends implementing controls to mitigate fraud risks and bolster the accuracy of automated models used in the BNPL lending process.
Compliance with relevant laws and regulations is of utmost importance for banks engaging in BNPL lending. Banks must clearly disclose borrowers’ obligations, associated fees, and adhere to consumer protection laws and regulations. The OCC specifically mentions laws and regulations such as the Equal Credit Opportunity Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and others that may apply.
The issuance of this guidance reflects the OCC’s commitment to ensuring responsible and secure lending practices in the BNPL space. By providing banks with specific recommendations and areas of focus, the OCC aims to promote consumer protection and mitigate risks associated with BNPL lending.
In conclusion, the OCC has issued guidance to banks on managing risks related to BNPL lending. The guidance emphasizes the need for tight oversight of third-party servicers, transparent loan terms, and heightened fraud mitigation. Banks are advised to carefully assess borrowers’ creditworthiness, integrate BNPL lending partnerships into their risk management frameworks, establish fair policies for handling returns and disputes, and comply with applicable laws and regulations. Through this guidance, the OCC aims to safeguard consumers and promote sound lending practices in the BNPL space.
