Illinois adopts new rules covering Buy Now Pay Later
New York and California adopted BNPL regulations earlier. Other states are expected to follow.
Illinois Governor J.B. Pritzker has signed legislation to protect people who take out Buy Now Pay Later (BNPL) loans from hidden charges, unaffordable loans, purchase disputes, and other risks.
Most BNPL loans are taken out by people with subprime credit scores and borrowers are disproportionately Black, Hispanic, female, and young.
“Strong protections for Buy Now, Pay Later loans are important, especially as these loans are being used for everyday expenses like groceries, and are being pitched for vital necessities such as rent,” said Lauren Saunders, senior attorney at the National Consumer Law Center (NCLC). “As buy now, pay later loans become ubiquitous, we’re pleased to see the Illinois legislature ... step up to fill gaps in federal and state protections, especially with the dismantling of the Consumer Financial Protection Bureau (CFPB).”
California was the first state to explicitly require licenses for buy now, pay later lenders, and New York passed the first comprehensive state law. A recent issue brief from NCLC shows how other states can adapt and build on the New York law to strengthen protections for borrowers nationwide.
The Illinois law covers closed-end loans with four or fewer installments or a term of 120 days or less. Among other protections, the law:
- Limits BNPL loans to the 36% rate cap that covers other lenders in Illinois, and gives the state regulator the authority to limit late fees and other fees.
- Requires lenders to conduct reasonable risk-based underwriting and to consider the borrower’s ability to repay the loan.
- Prohibits lenders from requiring automated payments or attempting to debit a bank account a second time or more if the account has insufficient funds.
- Gives people the same rights in the case of disputes or errors that people have for credit cards under federal law
- Requires a license even for lenders that do not charge interest.
People often get caught in the middle between the BNPL lender and the store if they return a purchase or don’t get what they paid for. And while the typical four-payment BNPL loan promises “no interest,” some charge a range of hidden junk fees, NCLC said. These unaffordable loans and complicated repayment plans can also trigger overdraft fees, exacerbating affordability concerns and driving people deeper into debt.
Building on the Illinois and New York legislation, states looking to protect residents from harmful BNPL lending practices should ensure that their lending laws cover the different types of BNPL loans, provide clear disclosures, limit fees and interest rates, require assessment of a borrower’s ability to repay, prohibit repeat debiting of bank accounts, and ensure documents are provided in the borrower’s native language, among other key priorities outlined in NCLC’s issue brief.
About the Illinois law
The Illinois law defines a “buy-now-pay-later loan” as closed-end credit provided to a consumer in connection with a particular purchase of goods or services that either:
- is payable in four or fewer installments; or
- has a term of 120 days or less.
Importantly, the definition expressly includes both no-interest BNPL products and products that impose interest, finance charges, or both.
The definition excludes several categories of transactions, including:
- seller-financed credit in which the creditor is the merchant selling the goods or services (subject to certain exceptions);
- motor vehicle loans;
- residential mortgage loans; and
- loans made to merchants to finance inventory purchases.
Why it matters
The Illinois Buy-Now-Pay-Later Loan Consumer Protection Act is significant for several reasons.
First, it represents one of the earliest comprehensive state efforts to regulate BNPL providers through a dedicated licensing and supervisory framework.
Second, the Act adopts a broad approach to determining who is subject to regulation, reaching beyond traditional lenders to arrangers, agents, servicers, and other participants in the BNPL ecosystem.
Third, the statute’s anti-evasion and true-lender provisions could have important implications for bank-fintech partnerships and other structures involving entities that might otherwise be regarded as exampt.
Fourth, loans made by an unlicensed person are void and unenforceable.
"Companies participating in the BNPL ecosystem, or otherwise making short term consumer loans, should begin assessing whether they will be required to obtain an Illinois license and whether existing business arrangements could be affected by the Act’s expansive anti-evasion provisions," the prominent law firm Ballard Spahr cautioned in its blog.
More about Buy Now Pay Later ...
James R. Hood
