Providers of Buy Now, Pay Later (BNPL) payment plans are, for purposes of consumer financial protection laws, lenders subject to some of the same regulatory requirements as credit card issuers, under a recent interpretive rule issued by the Consumer Financial Protection Bureau (CFPB). This interpretive rule is the first step the CFPB has taken to regulate the growing BNPL industry. The CFPB is accepting comments on this interpretive rule, but no further action by the CFPB is needed for this interpretive rule to take effect on July 30, 2024.
Under this new interpretive rule, providers of BNPL loans—that is, consumer loans for retail transactions that are repaid in four or fewer interest-free installments, without any finance charges—must provide consumers with certain legal protections and rights that apply to conventional credit cards under Regulation Z.1 In particular, providers of BNPL loans must comply with the following regulatory requirements:
- investigating disputes that consumers initiate, pausing payment requirements during the investigation, and, under certain circumstances, issuing credits;
- crediting refunds to consumers’ accounts when consumers return products or cancel services; and
- providing periodic billing statements to consumers such as those received for classic credit card accounts.
Importantly, however, providers of BNPL loans are not subject to all regulations that may govern credit card issuers. For example, the interpretive guidance explicitly states that, unlike some traditional credit card issuers, providers of BNPL loans are not subject to regulatory limits on the penalty fee a lender may assess or requirements to consider the consumer’s ability to pay.
Key Takeaways
Taken together, the practical impact of the interpretive rule extends beyond providers of BNPL loans. Merchants and platforms that partner with a BNPL lender or white label a BNPL product may face increased costs, particularly with respect to developing and coordinating specific dispute resolution and right of return processes with BNPL lenders, and implementing them to comply with Regulation Z. A careful review of customer-facing terms, and possible revisions, may also be needed to ensure compliance with Regulation Z.
The interpretive rule also signals the possibility of additional future regulation. The CFPB has previewed many of the policy concerns highlighted in the interpretive rule in publications dating back to 2021 (“CFPB Opens Inquiry into ‘Buy Now, Pay Later’ Credit,” “Consumer Use of Buy Now, Pay Later: Insights from the CFPB Making Ends Meet Survey,” “CFPB Study Details the Rapid Growth of ‘Buy Now, Pay Later’ Lending”). A number of the policy concerns identified in the CFPB’s interpretive rule were also discussed in a previous bulletin issued by the Office of the Comptroller of the Currency, Retail Lending: Risk Management of ‘Buy Now, Pay Later’ Lending (OCC Bulletin 2023-37). Some of the risks identified were the risk of fraud, particularly as BNPL loans are often made under a fully automated process, and the risk of consumer over-indebtedness, as a given BNPL lender may not have visibility into how or if a consumer has debt with other BNPL lenders (as those debts may not be reported to credit bureaus).
There may well be room for future regulation. In its legal analysis underpinning the interpretive guidance, the CFPB referenced Congress’s intent in drafting the terms contained in the Truth in Lending Act (TILA)—in particular, “credit card” and “other credit device”—to have a “flexible and comprehensive” definition. The interpretive rule concludes that such terms encompass a consumer’s BNPL digital user account.
Understanding the evolving regulatory landscape is critical to the success of providers of BNPL loans, as well as the merchants and platforms that partner with them. To learn more about this interpretive rule, TILA, or Regulation Z, please reach out to Jess Cheng or another member of Wilson Sonsini’s fintech and financial services practice.
[1] Particularly Subpart B (Open-End Credit) of Regulation Z. While Subpart B generally covers open-end credit arrangements (unlike most BNPL loans), certain provisions apply regardless of the type of credit offered, such as credit that is not subject to a finance charge and not payable in more than four installments.