Overview
On May 22, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule that has the effect of requiring providers of closed-end "Buy Now Pay Later" (BNPL) credit products to apply certain open-end credit consumer protections in the Truth in Lending Act (TILA) and its implementing Regulation Z, including the right to allege transaction disputes, the right to receive paper statements, among other disclosures, and the right to a prompt refund when a merchant accepts a return. The interpretive rule takes effect on July 30 and raises several questions about how BNPL providers are expected to comply.
What Is BNPL?
For purposes of the interpretive rule, the term BNPL refers to "a consumer loan for a retail transaction that is repaid in four (or fewer) interest-free installments and does not otherwise impose a finance charge." 89 Fed. Reg. 47068, 47069 (May 31, 2024). Each BNPL loan is separately underwritten and "generally requires an initial down payment of 25 percent, followed by three additional installments due every two weeks." Id. at 47069–47070.
In other words, a BNPL loan is a short-term, closed-end installment loan, and BNPL providers have generally treated them as such. For example, many BNPL providers provide disclosures akin to those required by Subpart C of Regulation Z for each BNPL transaction.
BNPL Under the Interpretive Rule – Substantive Implications
Under the interpretive rule, a BNPL provider that issues a "digital user account" to extend BNPL credit is a "card issuer," and a “creditor” subject to Subpart B of Regulation Z. As a result, BNPL loans must comply with the requirements of Subpart B even though those requirements by their terms apply only to open-end credit plans. That being said, what does compliance practically look like for a "credit card" that accesses BNPL loans?
1. Disclosure Requirements: Unlike the closed-end disclosure requirements in Subpart C, the disclosures required by Subpart B apply at the account level, not the transaction level. BNPL providers who are used to providing disclosures specific to each loan will have to rethink how to provide disclosures in compliance with Subpart B, including account-opening disclosures required by § 1026.6(b) and change-in-terms notices required by § 1026.9(c).
2. Periodic Statements: Regulation Z requires creditors to provide periodic statements to consumers each "billing cycle." A "billing cycle" can be as long as a calendar quarter. See 12 C.F.R. § 1026.2(a)(4). Each statement must detail the transactions made, amounts due, and any applicable fees. BNPL providers will have to set a billing cycle and determine how to disclose BNPL transactions on a statement in compliance with 12 C.F.R. §§ 1026.7 and 8. This raises questions about, for example, when to send statements and whether to aggregate amounts due when a consumer has multiple outstanding BNPL transactions at once. Depending on whether a consumer has more than one BNPL loan outstanding, a BNPL provider may be able to structure the billing cycle to avoid having to provide periodic statements altogether.
3. Transaction Disputes: Several provisions of Regulation Z provide consumers robust, sometimes overlapping, rights to dispute account transactions, in many instances requiring creditors to investigate and resolve the dispute within a limited time period. BNPL providers will have to overhaul any existing dispute policies to comply with these requirements, including the following:
a. Billing Errors. Section 1026.13 implements much of the Fair Credit Billing Act. Generally, it gives a consumer the right to challenge certain "billing errors," as defined, including some disputes with merchants over purchases. A creditor must complete a "reasonable investigation" of the claim, which may include gathering information from the merchant and consumer as appropriate to resolve the dispute fairly. The provision also has detailed procedural and timing requirements, including, among other things, preventing collection of the disputed amount and requiring that the investigation be completed within 90 days.
b. Liability for Unauthorized Use. Section 1026.12(b) gives a consumer the right to allege "unauthorized use" of the account—i.e., transactions without the consumer's consent—and, provided certain conditions are met, obligates the issuer to investigate and resolve the claim.
c. Right to Assert Merchant Claims Against Issuer. Section 1026.12(c) gives a consumer the right to assert against the creditor a claim or defense that would be available against a merchant in connection with a purchase if the merchant has "fail[ed] to resolve" the consumer’s claim.
4. Refund Credits for Returned Items or Canceled Services: When a consumer returns a product or service and receives a merchant credit, the BNPL provider must promptly credit the consumer’s account. The provider also must provide a refund of any account credits at the consumer’s request, among other reasons. § 1026.12(e).
5. Advertising: Section 1026.16 sets forth certain requirements related to advertising credit. For example, a provision likely applicable to BNPL loans requires an advertisement that states a periodic payment amount to also disclose "the total of payments and the time period to repay the obligation, assuming that the consumer pays only the periodic payment amount advertised." § 1026.16(b)(2). Such a disclosure likely would be straightforward for BNPL providers who already disclose the total price and the number of required payments. Still, there may be instances where, depending on context, the disclosures provided are not sufficient to technically comply with Regulation Z.
A related provision requires a creditor who advertises certain credit terms, including the absence of finance charges – e.g., "0% APR" – also to disclose certain other applicable financial terms. § 1026.16(b)(1). BNPL providers seeking to advertise the no-finance-charge nature of BNPL loans must be mindful of these disclosure requirements.
6. Statement of Billing Rights: Section 1026.9(a) requires a creditor to either (A) deliver annually a statement of the consumer's billing rights (i.e., a summary and description of Regulation Z's dispute rights) or (B) disclose a billing rights statement on or with each periodic statement. Traditional credit card issuers generally follow the latter alternative. BNPL providers may find it advisable to do the same, given the characteristics of BNPL loans.
Risks of Non-compliance
Following the US Supreme Court's ruling in CFPB v. Community Financial Services Ass'n of America, Ltd. upholding the constitutionality of the CFPB’s funding, the CFPB has been emboldened and has accelerated its focus on rulemakings and substantive guidance before this Fall’s elections.
The interpretive rule is consistent with that aggressive posture and, because it is an "interpretation" of an existing rule, rather than the implementation of a new one, it can take effect without interference from political actors and without notice and comment (though the CFPB will accept comments on the Rule until August 1, 2024, and "may" make changes in response). Still, the CFPB’s eschewing of notice and comment rulemaking has drawn some industry criticism. That aspect of the interpretive rule, and its substantive conclusions, will likely be challenged in court.
At a time when many large BNPL providers have submitted voluntarily to CFPB supervision, the interpretive rule lays a compliance marker for the industry. Non-compliance could result in substantial fines and penalties. BNPL providers may also face increased litigation risks from consumers adversely affected by non-compliant practices. This could encompass lawsuits related to improper handling of disputes or failure to provide required disclosures; we expect private plaintiffs alleging improper handling of disputes or failure to provide adequate disclosures to cite the interpretive rule. BNPL providers should act now to review their procedures and make necessary adjustments, particularly in acknowledging and investigating consumer disputes.
