CFPB Subjects Certain BNPL Products to Credit Card Requirements

On May 22, 2024, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule indicating that certain Buy Now, Pay Later (BNPL) products are subject to certain provisions of Regulation Z that apply to credit card providers. Many BNPL providers have historically taken the view that their products are not subject to the provisions of Regulation Z because the products are limited to four payments (pay-in-four) with no associated finance charge. In contrast, Regulation Z generally applies to credit subject to a finance charge or payable in more than four installments.

In the interpretive rule, the CFPB takes the position that BNPL products that use digital user accounts “mimic conventional credit cards” and, thus, meet the applicable definitions under subpart B of Regulation Z (subpart B). The CFPB acknowledges that, although BNPL products are not open-end credit, many provisions of subpart B apply more broadly to include close-end credit, and Congress gave the CFPB authority to apply open-end credit regulations in these circumstances.

Against that backdrop, the interpretive rule requires BNPL lenders to provide cost-of-credit disclosures, investigate disputes, refund returned products or cancelled services, and provide billing statements. The CFPB touted this guidance as leveling the playing field by imposing on BNPL providers the consumer protections that already exist for credit card purchases.

CFPB Oversight of BNPL Products

The CFPB started researching BNPL programs in 2021, first by issuing requests for information from five companies offering BNPL programs and then by publishing a request for public comment on its inquiry into the BNPL providers. As part of these efforts, the CFPB also requested that major BNPL providers voluntarily submit to the CFPB’s supervisory authority.

Following these inquiries, the CFPB released two reports on BNPL.  In the first report, the CFPB identified concerns that BNPL products offer inconsistent consumer protections and encourage customers to borrow more than they should. The second report discussed the financial profiles of BNPL users. That report found that BNPL users are more likely to be active uses of other credit products like credit cards, payday loans, and student loans, and exhibit higher measures of financial distress than non-BNPL users. Our earlier client alert explores these findings in more detail.

The Interpretive Rule

The interpretive rule indicates that certain BNPL products are subject to certain subpart B provisions, including those governing disclosures and disputes. In particular, the interpretive rule requires BNPL providers to:

• Investigate disputes: BNPL lenders must investigate consumer disputes and, in certain circumstances, pause payment requirements during the investigation. Where warranted, BNPL providers must issue credits to consumers.
• Process refunds: If a consumer returns goods or cancels services that are funded through a BNPL product, lenders are required to credit refunds to the consumer’s digital user account. These refund obligations may pose operational challenges for BNPL providers, as the BNPL landscape is constantly evolving, and the interaction between the parties (i.e., consumers, merchants, and lenders) vary under each model.
• Provide billing statements: BNPL providers must provide periodic billing statements to consumers, similar to those provided for classic credit card accounts.

The interpretive rule appears to apply only to pay-in-four BNPL products, as it defines covered BNPL providers as only those that offer closed-end consumer loans for a retail transaction that have no finance charge and are repaid in four (or fewer) interest-free installments. The CFPB also indicated that business-purpose BNPL loans are covered to the same extent that a business-purpose credit card would be governed by subpart B.

The interpretive rule further notes that a lender who issues a digital user account to access BNPL credit is generally not subject to the credit card regulations in subpart G of Regulation Z. These obligations include determination of ability to pay, limits on penalty fees, and rate increase reevaluation requirements.

The interpretive rule is applicable 60 days following publication in the Federal Register, and comments are due by August 1, 2024.

Key Takeaways

The positions the CFPB takes in the interpretive rule are not surprising. They align with its findings concerning consumer impact and protections set forth in reporting and in numerous public statements concerning BNPL products. Our team also noted these issues in connection with out-of-network BNPL payments that allow customers to make purchases at merchants that are not part of a BNPL provider’s ecosystem. Furthermore, the obligations imposed on BNPL providers through the interpretive rule tend to align with customer service features that many major BNPL providers are already offering. Nonetheless, the interpretive rule takes an important step in clarifying the CFPB’s view of the appropriate regulatory treatment of BNPL products, which has been an area of uncertainty for several years.

That said, there are additional considerations that this rule may trigger:

Credit Reporting. The CFPB has encouraged providers to offer credit reporting for consumers that use BNPL products. New York has also attempted to require BNPL providers to implement policies and procedures related to accurate credit reporting, an effort that has not currently advanced out of the New York legislature. With a few notable exceptions, BNPL providers have not engaged in credit reporting for pay-in-four BNPL products. The CFPB’s classification of these products as credit cards may require providers to report these loans as open-end lines of credit instead of a closed-end installment loan, which may present operational and other challenges.

Other Rulemaking. This interpretive rule could also have implications regarding other CFPB rulemakings, including the CFPB’s proposed opening banking rule, which is set to implement Section 1033 of the Dodd-Frank Act. As drafted, the proposed rule applies to any “covered financial product or service,” which would include any “credit card” as defined in Regulation Z. It is unclear at this stage whether the interpretive rule would also require BNPL providers to comply with open banking requirements, including providing consumers and authorized third parties with certain access rights to BNPL accounts. We note that the CFPB’s press release issued along with the proposed opening banking rule indicated that “[t]he CFPB intends to cover additional products and services in future rulemaking.”

Merchants and other entities offering BNPL products should carefully review the CFPB’s recent guidance and forthcoming guidance to better understand their compliance obligations. Should you have any questions about the interpretive rule, please reach out to the authors of this alert.