On May 22, 2024, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule identifying Buy Now, Pay Later Lenders (BNPL Lenders or Lenders) as “card issuers” or “creditors” for the purposes of Regulation Z, Subsection B, thus making them required to comply with various consumer protection provisions ranging from charge disputes to refunds. The interpretive rule is currently open for public comment and the comment period will remain open until August 1, 2024.
In 2021, the CFPB shifted its attention to monitoring (BNPL) Lenders due to the skyrocketing usage of their products. These lenders offer consumers the option to split their purchases into multiple payments, presenting an appealing alternative to high-interest credit cards, especially for those with limited or no credit history. Typically, the payment plans involve as few as four installments, often requiring only a 25% down payment, leading many to liken it to a contemporary layaway program. Given the increasing trend of online shopping and the expanding “in-store” accessibility of BNPL services, it was inevitable that the CFPB would take action.
Well-known Lenders in this space were issued orders requesting information that would allow the CFPB to assess the risks and benefits to consumers presented by such credit products. The goal was to satisfy the CFPB’s growing concerns surrounding “accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.”1 The findings of this initial inquiry were significant, thus prompting action.
In the resulting market report, over $24 billion was distributed via 180 million loans in 2021, which tripled 2020’s numbers and was 12 times the amount originated in 2019. Findings in this study most relevantly included inconsistent in the providing of disclosures and failure to provide dispute protections.
In 2021 alone, the CFPB found that among these five surveyed Lenders, $1.8 billion in transactions (or around 13.4% of loans issued) were involved with a dispute or return, and often the consumers were left without much assistance or understanding of how to navigate the process when a return or billing dispute was involved.2
Using the findings of its own inquiries in conjunction with information garnered from other market monitoring or investigation, the CFPB published the Rule for comment. Herein, it asserts:
“that lenders that issue digital user accounts that consumers use from time to time to access credit products to purchase goods and services are “card issuers” under Regulation Z, including when those products are marketed as Buy Now, Pay Later (BNPL). Such lenders are “card issuers” because such digital user accounts are “credit cards” under Regulation Z.”3
The Rule also delves into the legal reasoning the CFPB applied to reach its conclusion. The stance is influenced heavily by the Truth in Lending Act (TILA), which reinforces Congress’ intent that the regulation be applied to a broad definition of “credit device” and “credit card,” not just traditional credit cards. This intent is also reflected in the decisions of cases such as Begala v. PNC Bank, Ohio, Nat’l Ass’n, and Rossman v. Fleet Bank (R.I.) Nat. Ass’n, wherein courts applied a broad interpretation of TILA, favoring the consumer.
In the same vein, the CFPB has concluded that BNPL Lenders’ products “are, effectively, digital replacements for conventional credit cards, and consumers use them in the same way as conventional credit cards. The statutory and regulatory definitions of ‘credit card’ are broad enough to capture new, technologically advanced ‘devices’ designed to mimic the core features of conventional credit cards.” This mimicry of traditional credit cards places BNPL Lenders who offer such products in line with a broad interpretation of definitions under the regulations, both as a “credit issuer” under Regulation Z4 and as a “creditor” under subpart B, thus requiring such lenders to comply with the requirements therein focused on disclosures and billing dispute resolution.5
Although not required to do so, the CFPB has published the interpretive rule for public comment, which ends on August 1, 2024. Following the closure of the comment period, the CFPB will finalize the interpretive rule, and the rule will be applicable 60 days following its publication in the Federal Register. Until then, BNPL Lenders can begin to prepare for the rule by carefully reviewing the applicable regulations and working to preemptively ensure they will be able to meet the requirements therein.
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3. https://files.consumerfinance.gov/f/documents/cfpb_bnpl-interpretive-rule_2024-05.pdf
4. https://www.consumerfinance.gov/rules-policy/regulations/1026/2/#c255a7e51dba77c
5. https://www.consumerfinance.gov/rules-policy/regulations/1026/5/
© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
