With the introduction and popularity of Buy Now, Pay Later (BNPL) loans posing risk to both borrowers and housing market stability, these short-term, no-interest financing options that split the cost of a purchase into several equal installments, are serving as an alternative to using a credit card, particularly for online purchases.
In 2022, BNPL loans accounted for approximately 5% of all online purchases, a figure projected to grow to 7% by 2026. And, the number of BNPL users in the U.S. is forecast to increase from 82.1 million in 2023 to 112.7 million by 2027, according to drop shipping app Oberlo. The rapid rise of BNPL can have an impact on consumer credit, household debt management, and mortgage qualification.
In late June, the U.S. Department of Housing & Urban Development (HUD) issued a Request for Information (RFI) seeking public input to better understand the implications of BNPL lending on housing affordability and stability. The input gathered in response to this RFI will assist HUD in ensuring that Federal Housing Administration (FHA) single-family mortgage insurance policies effectively address an evolving financial landscape, while supporting the ever-shifting needs of the nation’s households.
Several industry trade groups, including America’s Credit Unions, the American Bankers Association (ABA), and Mortgage Bankers Association (MBA), have all issued their input on whether BNPL usage affects a household’s risk profile for purposes of mortgage eligibility for FHA-insured mortgage programs.
America’s Credit Unions Regulatory Affairs Counsel Tyler Maron warned that unreported BNPL obligations could be harmful in FHA lending, which serves borrowers with smaller down payments and lower credit scores. Defaults in this segment could increase claims against FHA’s Mutual Mortgage Insurance (MMI) Fund and undermine the program’s stability.
“… because most BNPL providers do not currently furnish data to credit reporting agencies, these debts may not appear in mortgage applications, leading to undercounted borrower liabilities,” said Maron. “Accordingly, FHA lenders may be unaware of a borrower’s BNPL loans, existing obligations, and potential defaults. While this issue will be mitigated with Fair Issac Corporation’s (FICO) introduction of its new BNPL model and BNPL providers sharing complete loan data to credit bureaus, widespread adoption may take time.”
Maron continued that “invisible” debt associated with BNPL loans could prevent underwriters from having a complete picture of a borrower’s obligations.
“Credit unions are concerned about members’ use of buy now, pay later (BNPL) products that is not reported to consumer reporting agencies because it creates “invisible” debt, preventing underwriters from having a complete picture of a borrower’s obligations,” continued Maron. “In mortgage lending, this hidden liability can lead to inaccurate debt-to-income (DTI) calculations, overstated creditworthiness, and higher default risk, particularly in rising interest rate or economic downturn scenarios. For FHA-backed mortgages, the risk is compounded because the program targets borrowers with lower credit scores and smaller down payments, meaning even modest unreported debt can significantly affect repayment capacity. This could increase delinquencies and claims against the FHA’s Mutual Mortgage Insurance Fund, undermining program stability.”
In its letter, the ABA’s Rod J. Alba, SVP, Real Estate Finance, Mortgage, Regulatory Compliance & Policy, expressed concern that banks report that BNPL providers lack consistent credit reporting policies, which means that even when reported, the resulting data is incomplete or inconsistent, and not captured in borrower credit histories.
“ABA banks report that they may be able to detect BNPL repayment from observable patterns in their customer’s bank statements,” said Alba. “BNPL payments may appear as debit transactions from the user’s bank account or credit card, and they may be labeled with the provider’s name (e.g., Klarna, Affirm, Afterpay, Splitit). However, these entries do not indicate whether they are installment payments or relate to a specific purchase, making it difficult to confidently identify a BNPL obligation. Even when BNPL product repayment is identified, bank statements provided by customers do not identify actual repayment terms.”
Much like the “invisible” debt aspect raised by Maron of America’s Credit Unions, the ABA’s letter voiced the same concern.
“BNPL repayment patterns are invisible to institutions where customers remit payment through channels other than the bank,” added Alba. “Today, lenders are increasingly asking consumers to report BNPL usage when applying for credit. This approach is, however, often unreliable, as banks cannot confirm the veracity or accuracy of reporting, and consumers may not understand BNPL arrangements to report on them properly.”
In its letter, the MBA recommended that the FHA adopt interim underwriting guidance that provides lenders with direction, as broader policy and credit reporting infrastructure continue to evolve.
“This interim guidance should be considered as a transitional step. We encourage FHA to commit to revisiting its BNPL policy once the credit bureaus begin to receive regular reporting from BNPL providers,” said Brendan Kelleher, Associate VP, Government Housing Finance, Residential Policy and Strategic Industry Engagement for the MBA. “Even though lenders comply with FHA suggested FAQ guidance, it is cumbersome. A foundational first step in that process is for FHA to establish a clear, standardized definition of BNPL debt to help lenders determine which obligations should be evaluated under BNPL guidance.”
MBA also stressed the development of greater transparency and standardized reporting for BNPL loans in its recommendations.
“Given the impact of the final policy for risk management and potential claims liability, we urge FHA to engage with industry practitioners to test the operation of the proposed guidance before finalizing it,” added Kelleher in the MBA’s RFI letter. “This will assist FHA in calibrating any final policy to ensure it is workable under real-world operating conditions. This will reduce the risk of second guessing when forensic reviews of delinquent loans are performed in the future.”
As the nation’s financial landscape evolves, HUD intends to consult groups like America’s Credit Unions, the ABA, and MBA for guidance on risk assessment over its offerings as products like BNPL loans and more hit the market.
