The Consumer Financial Protection Bureau’s interpretive rule for Buy Now, Pay Later products classifies them as “credit cards” and their providers as “card issuers” and “creditors” under the Truth in Lending Act and Regulation Z. The rule is now in effect.
While the CFPB reviews submitted comments, which were due Aug. 1, and assesses whether modifications to the interpretive rule are warranted, companies are expected to comply. Retailers must immediately evaluate the rule’s potential impact on how they conduct business and anticipate possible compliance requirements at the federal and state levels.
BNPL product offerings and consumer usage in the US have surged in recent years, leading to regulatory scrutiny by the CFPB and other agencies.
The industry had been expecting further regulation since the CFPB issued its BNPL report in 2022, which identified products’ lack of standardized disclosures, dispute resolution challenges, compulsory use of autopay, multiple payment representments, late fees, overextension, and data harvesting as high risks to consumers.
Prior to the interpretive rule, BNPL products generally were understood to fall outside of Regulation Z’s scope. The rule changed this understanding, stating that the phrase “other single credit device” in Regulation Z’s definition of credit card includes “digital user accounts that consumers can use through websites, mobile apps, browser extensions, or integrations with merchant websites or mobile apps to access BNPL credit for the purchase of goods and services.”
Third-party BNPL providers will have to comply with certain provisions related to open-end credit under Subpart B of Regulation Z.
Although the interpretive rule doesn’t address its applicability to retailer partners directly, 12 CFR Section 1026.1(c)(1), which addresses coverage, liability, and enforcement under the regulation, expressly provides that the regulation applies to each business that offers or extends credit.
Regulation Z doesn’t define “offers” but, state regulators often consider an entity to be offering credit when it promotes or advertises the availability of credit from another, providing a foothold for CFPB supervision over retailers.
The CFPB’s official interpretations appear to support our understanding, stating that the advertising requirements in 12 CFR Section 1026.2(a)(2) apply to commercial messages promoting consumer credit transactions, such as point-of-sale financing displays or website/mobile app plugins often used by retailers offering third-party BNPL products.
Such retailers should read the interpretive rule and work with legal counsel to implement third-party vendor oversight policies to ensure their partners’ ongoing compliance with Regulation Z requirements.
The oversight policies should concentrate on BNPL partners’ adherence to timing requirements for periodic billing statements—these may present the greatest operational challenge because of the nature of BNPL products. As elucidated by the interpretive rule, third-party BNPL providers will be subject to Subpart B, providing general examples such as periodic statements, credit disclosures, billing disputes, error resolution, refund rights, and cardholder liability.
Nevertheless, the CFPB lacked the same decisiveness and clarity for how BNPL providers should incorporate and apply such compliance provisions in the BNPL context. At a minimum, it seems that BNPL providers will be required to do the following under Regulation Z, assuming there’s no grace period applied to the account:
- Mail or deliver periodic statements at least 14 days prior to the date on which the required minimum periodic payment must be received to avoid being treated as late for any purpose
- Not treat as late for any purpose a required minimum periodic payment received within 14 days after mailing or delivering the periodic statement
- Provide a properly formatted periodic statement that includes all information contained in 12 CFR Section 1026.7
- Adhere to Regulation Z’s requirements for taking notice of and resolving any billing errors
To avoid CFPB scrutiny, retailer partners should audit their BNPL partners annually and ensure any issues of material non-compliance with Regulation Z are remediated quickly.
While its issuance may not send shockwaves through the industry, several BNPL providers have criticized the CFPB for applying an antiquated regulatory framework to the product, with some calling for the CFPB to withdraw the rule altogether.
Also meriting attention is whether retailers that partner with third-party BNPL providers will face similar regulatory requirements or CFPB supervision for its oversight of their BNPL partners. Regulation Z language suggests they might be.
Further regulation is likely on the horizon, as the interpretive rule only addresses a subset of the concerns raised in the 2022 report. State regulators may join the CFPB in regulating BNPL products, along with the retailers that offer those products. If that happens, BNPL providers may need to obtain state lending licenses and retailers may need to obtain state licenses to offer—that is, broker—BNPL products to consumers.
