CFPB Issues Interpretive Rule Related to Certain 'Buy Now, Pay Later' Consumer Credit Products


On May 22, the Consumer Financial Protection Bureau (CFPB) released an interpretive rule (Rule) that subjects certain "buy now, pay later" (BNPL) providers to requirements set forth in the Truth in Lending Act's implementing regulations.1 For purposes of the Rule, the CFPB's position defines BNPL products as "closed-end loans payable in four or fewer installments without a finance charge, used to make purchases on credit."

The Rule is somewhat limited in its application. Importantly, it does not apply to BNPL products that are offered through the "merchant partner acquisition model," which the Rule generally defines as a program whereby "BNPL lenders typically establish contracts with online merchants to offer their BNPL product as a payment option on the merchant's website or mobile app checkout page." Rather, the Rule is limited to BNPL providers that issue "digital user accounts" to consumers to access credit products to purchase goods and services, which generally involves the following:

[C]onsumers use the BNPL lender's own website or mobile app directly to create a digital user account to access the BNPL product. Once activated by the provider, the consumer can use their digital user account through the BNPL website or mobile app to access credit and make purchases directly with partner merchants. For non-partner merchants, the BNPL lender enables the payment part of the credit process by issuing a single-use virtual card to the consumer, normally through an issuer processor and a bank partner. The consumer then typically has 24 hours to complete their purchase directly with the merchant, using the virtual card … [A] BNPL digital user account is activated when a consumer first accesses BNPL credit, similar to how a virtual card number for a traditional credit card account is issued … BNPL providers typically inform consumers of their "amount available to spend," similar to a credit limit for conventional credit cards … [Digital user accounts] are, effectively, digital replacements for conventional credit cards, and consumers use them in the same way as conventional credit cards.

According to the Rule, issuers of digital user accounts are "card issuers" because digital user accounts are "credit cards"; this assessment then permits the CFPB to determine that these BNPL providers of digital user accounts are "creditors" for purposes of Regulation Z.2 As noted by the CFPB, the term "credit card" is defined both in the Truth in Lending Act and Regulation Z to include "other credit devices" or "other single credit devices" used for the purpose of obtaining credit and is not limited to "a plastic or metal embossed physical card."3 Based on these interpretations, the Rule advances the position that digital user account providers are subject to Subpart B of Regulation Z, including regulatory provisions related to cost of credit disclosures and billing dispute resolutions.

Notably, the CFPB's announcement states that it is not required, under the federal Administrative Procedures Act (APA), to collect public comments related to the Rule. However, the agency has determined that it will accept public comments if received by August 1.

WHY THIS MATTERS


1 12 CFR Part 1026 (Regulation Z).
2 The applicable definition of "creditor" is set forth at 12 CFR 1026.2(a)(17)(iii). The Rule further notes that BNPL products are not "open-end credit" as defined at 12 CFR 1026.2(a)(20) or a "credit card account under an open-end (not home-secured) consumer credit plan" as defined at 12 CFR 1026.2(a)(15)(ii).
3 The definition of credit card is "any card, plate, or other single credit device that may be used from time to time to obtain credit." 12 CFR 1026.2(a)(15)(i). The CFPB believes that the term "other single credit device" in Regulation Z and a corresponding definition in the Truth in Lending Act as inclusive of a BNPL "digital user account that a customer can use through websites, mobile apps, browser extensions, or integration with merchant websites or mobile apps" to access BNPL credit.
4 Joanna Stavins, Buy Now, Pay Later: Who Uses it and Why, Federal Reserve Bank of Boston, May 23, 2024 (available at: https://www.bostonfed.org/publications/current-policy-perspectives/2024/buy-now-pay-later-who-uses-it-why.aspx#:~:text=Consumers%20with%20low%20FICO%20credit,credit%20scores%20higher%20than%20800.)

©2024 Katten Muchin Rosenman LLP
National Law Review, Volume XIV, Number 179