HUD must address risks of Buy Now, Pay Later in mortgage underwriting

“Phantom debt” tied to Buy Now, Pay Later (BNPL) poses risks to both borrowers and housing market stability, and America’s Credit Unions is urging the Department of Housing and Urban Development (HUD) to factor it into Federal Housing Administration (FHA) underwriting standards.  

In a letter responding to HUD’s request for information, America’s Credit Unions Regulatory Affairs Counsel Tyler Maron noted that while BNPL use has surged, most of these loans are not reported to credit bureaus. As a result, these debts often go undetected in mortgage applications, leading to inaccurate debt-to-income calculations and higher default risks. 

Maron warned that unreported BNPL obligations could be especially 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 Fund and undermine the program’s stability, he cautioned. 

To improve transparency, the letter urged HUD to require that BNPL debts are incorporated into underwriting — either through standardized reporting by BNPL providers or borrower disclosure of BNPL usage on loan applications.  

“Although America’s Credit Unions maintains concerns that BNPL may harm younger and lower income Americans, its growing usage requires implementation into FHA’s underwriting policies to ensure transparency and safeguards for credit unions,” wrote Maron. “America’s Credit Unions, while supporting broader access to credit, stresses the need for responsible lending practices that consider borrowers' financial health and repayment capabilities.” 

Read the full letter here.