In a recent bulletin, the Office of the Comptroller of the Currency (OCC) offers guidance to community banks on managing the risks associated with buy now, pay later (BNPL) loans. These loans can take many forms, but the bulletin focuses on those that are payable in four or fewer installments and carry no finance charges. Typically, these loans are offered at the point of sale. The lender pays the merchant a discounted price for the good or service and, in exchange, assumes responsibility for granting credit and collecting payments from the borrower. The lender’s primary source of revenue is the difference between the total installment payments and the discounted purchase price, though it may also collect late fees from the borrower.
The bulletin warns banks of various risks associated with BNPL loans. For example, borrowers may overextend themselves or not fully understand their repayment obligations; applicants with limited or no credit history may present underwriting challenges; and the lack of clear, standardized disclosure language may obscure the true nature of the loan, creating a risk of violating prohibitions against unfair, deceptive or abusive acts or practices. The OCC offers tips on designing risk management systems that “capture the unique characteristics and risks of BNPL loans.” You can find the bulletin at https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-37.html.
Guidance on venture loans
In another recent bulletin, the OCC offers guidance to banks considering venture lending — that is, commercial lending activities that target high-risk borrowers in the early, expansion, or late stages of development. According to the bulletin, the primary risks associated with venture lending include unproven cash flows, untested business models, difficulty projecting future cash flows, high liquidity needs, high investment spending, and limited refinancing or business exit options.
Typically, these risks are greater for borrowers at an earlier stage of development. The bulletin — which can be found at https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-34.html — provides guidance on managing these risks.
CFPB proposal would close overdraft loophole
The Consumer Financial Protection Bureau (CFPB) recently issued a proposed rule designed to rein in excessive overdraft fees charged by large banks. The proposal would end the exemption of overdraft lending services from the Truth in Lending Act and other consumer protection laws.
Banks would be permitted to extend overdraft loans if they comply with the requirements of these laws or, alternatively, charge a fee to recoup their costs at an established benchmark (as low as $3) or at a cost they calculate (provided they show their cost data). The proposed rule would apply only to insured financial institutions with more than $10 billion in assets, but it may be expanded to smaller institutions in the future.
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