The Federal Housing Administration (FHA) has opened a request for information on buy now, pay later (BNPL) lending as it seeks to understand its implications for housing affordability and stability. Comments are due by Aug. 25.
These installment loans — often referred to as “phantom debt” — gained popularity during the COVID-19 pandemic, particularly among younger and underserved consumers shopping online. But they typically don’t appear on a borrower’s credit report or factor into the mortgage underwriting process.
The U.S. Department of Housing and Urban Development (HUD), which oversees the FHA and has a fiduciary duty to mitigate unnecessary risk to the Mutual Mortgage Insurance Fund, said the information will help guide efforts to “address the evolving financial landscape.”
HUD referenced a January report from the Consumer Financial Protection Bureau (CFPB), which found that one in five consumers with a credit record financed at least one purchase using a BNPL product from a major provider in 2022. Of this group, 60% identified as “heavy users.”
The same report cited a 2% default rate due to the short and automatic repayment structures of BNPL financing. HUD said this suggests that “when used responsibly, BNPL products may serve as a lower-risk, short-term credit alternative for consumers with limited access to traditional financing.”
But HUD added that “as consumers take on additional short-term debt obligations through BNPL services, their capacity to manage housing-related expenses, such as rent or mortgage payments, may be affected.”
Currently, FHA policies do not include this type of debt. That’s because closed-end debts are not required to be included in underwriting if they will be paid off within 10 months of the mortgage closing date. They are also excluded if the monthly obligation is less than or equal to 5% of the borrower’s gross monthly income.
HUD’s move marks another step in the industry’s broader push for greater transparency around these products. Mortgage professionals have raised concerns about the lack of clarity and guidance surrounding BNPL loans, although most do not view them as a systemic risk.
In June, Fair Isaac Corp. (FICO) announced that it will incorporate BNPL data into two of its credit scores that are set to launch in the fall of 2025. BNPL products “are playing an increasingly important role in consumers’ financial lives,” said Julie May, vice president and general manager of B2B Scores at FICO.
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