CFPB Affords BNPL Customers Consumer Protections
The CFPB issued an interpretive rule on the use of digital user accounts to access "Buy Now, Pay Later" ("BNPL") loans. The rule requires that BNPL lenders investigate disputes, refund returned products or canceled services and provide billing statements under the Truth In Lending Act ("TILA"). (See related publication.)
The CFPB stated that Subpart B of Regulation Z applies to "lenders that issue digital user accounts that consumers use from time to time to access credit, which includes those lenders that market their loans as Buy Now, Pay Later". The CFPB determined that BNPL credit meets the broad definition of Regulation Z as a "closed-end consumer loan for a retail transaction that is repaid in four (or fewer) interest-free installments and does not otherwise impose a finance charge." The CFPB further determined that "'card issuers' are considered 'creditors' for purposes of Subpart B if they also extend 'either open-end credit or credit that is not subject to a finance charge and is not payable by written agreement in more than four installments.'"
The interpretive rule is effective 60 days after publication in the Federal Register. Comments on the interpretative rule are due by August 1, 2024.
In a statement, CFPB Director Rohit Chopra highlighted that the definition of "credit card" has evolved, coming to include digital forms of credit payment. He said that credit card users "generally know what to expect in terms of rights and protections."
Commentary
Director Chopra stated almost two years ago that he wanted the CFPB to extend "many of the baseline protections that Congress has already established for credit cards" to the BNPL sector. The rule marks a significant step forward in getting BNPL regulation in place in the United States.
It is noteworthy that some of the largest BNPL providers acknowledged that the interpretive rule does not require any major changes to their businesses, which suggests that industry reaction to this regulatory framework may be more positive than it has been to other recent CFPB regulatory developments. BNPL is largely marketed as an alternative to credit cards, offering consumers a more easily navigated fixed installment plan and the ability to avoid increasing revolving balances. While the CFPB recognizes some of these differences (and the rule does not subject BNPL to the entirety of requirements that attach to credit card accounts), market participants do take issue with what they argue is the CFPB's failure to differentiate enough between the two. It's not yet clear whether industry opposition will rise to the level of a formal challenge to this interpretive rule (e.g. under the Congressional Review Act.)
It is also important to remember that various Regulation Z provisions already apply to credit such as BNPL that is not open-end, not subject to a finance charge, and not payable by written agreement in more than four installments.
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