Although the financing of consumer goods and services is not a new concept, there has been a recent, rapid evolution in the methods, means, and speed of providing point-of-sale financing to consumers. The history of consumer credit traces back to retailers permitting consumers to pay for goods and services over time. Financing of goods and services was later outsourced to banks and finance companies who took on the risk, and reward, of financing on the retailer’s behalf. As time went on, the correlation between the creditor and the retailer became closer, at times becoming difficult to differentiate between the retailer and the creditor through the sales and financing process. Despite this point-of-sale financing evolution, roughly the same disclosure regime remains in place from 40 years ago.
Existing model disclosures are built for a physical world, but exponentially more transactions are taking place electronically, with this number drastically increasing due to the recent pandemic. The devices consummating these transactions are getting smaller and more mobile. Many model forms are built for 8½ × 14 paper, yet the size of Apple’s latest iPhone is 5.78 inches by 2.82 inches. Few creditors are deviating from model forms given the regulatory safe harbors afforded. Unfortunately, this practice does not always provide for the best consumer experience. Although retailers continue to provide products and services to consumers through consumer-preferred mediums—now, primarily mobile devices—partnering creditors are unable to adopt their financing disclosure regime to meet the customer sales experience that consumers have come to expect on these retailers’ platforms.
Several options are available to creditors to reconsider their disclosures framework. First, although creditors take comfort in model forms, using model forms is not the sole method to comply with the letter and spirit of the law. Creditors may consider creating alternative disclosures that comply with the technical requirements of the disclosure mandates in a mobile-device-friendly manner. Second, creditors may engage with retailers to determine customer pain points and evaluate whether to update model forms. In addition, the Consumer Financial Protection Bureau (CFPB) has provided avenues to test new disclosures, including the trial disclosure sandbox, where creditors can improve existing disclosures and test new forms with the CFPB. Additionally, creditors may engage with the CFPB’s Office of Innovation to request a no-action letter for a CFPB-approved disclosure or process.
As financing continues to integrate further with point-of-sale transactions, it remains pivotal that consumers are aware of when they are interacting with a bank (with consumer credit disclosures being the epitome of a consumer recognizing bank interaction) and when consumers are interacting with the retailer. This distinction is critical for several reasons, including true lender and privacy purposes. Regulatory developments and cases evaluating this issue have been rapidly increasing, likely due to more point-of-sale financing agreements and the interconnectedness of retailers and financers. The Office of the Comptroller of the Currency is attempting to address bank-partnership uncertainty through proposed regulation, while states continue to evaluate true lender concerns impacting their respective residents. In addition, privacy concerns for both the retailer and the creditor include ownership of information collected and usage rights with respect to that information, including the sharing and usage of information by third parties. An understanding of these increasingly complex data flows is important to evaluate issues under federal law, including the Fair Credit Reporting Act, as well as under state law, including the newly revised California Online Privacy Protection Act.
Finally, drawing clear lines delineating the retailer’s and the creditor’s responsibility is important for regulator interactions. Defining responsibilities clearly assists regulator inquiries and examinations as well as ultimate responsibility (which many times rests with the regulated entity) if there is a problem with the program. Regulators will be evaluating both the form and the substance of point-of-sale financing programs, and parties are well served to have clearly delineated ownership lines.
Point-of-sale financing continues to evolve faster than the times and legislation itself. For long-term success in this renewed growth opportunity, retailers and finance partners must look to both ancient and novel regulations while remaining closely connected to shifting consumer needs and behaviors.